UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission File Number: 333-45862
JOHN HANCOCK LIFE INSURANCE COMPANY
Exact name of registrant as specified in charter
MASSACHUSETTS 04-1414660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
John Hancock Place
Post Office Box 111
Boston, Massachusetts 02117
(Address of principal executive offices)
(617) 572-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 3 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Number of shares outstanding of our only class of common stock as of
October 31, 2003:
1,000
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
September 30,
2003 December 31,
(unaudited) 2002
---------------------------
(in millions)
Assets
Investments
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: September 30--$1,575.9; December 31--$1,777.2) .. $ 1,550.5 $ 1,727.0
Available-for-sale--at fair value
(cost: September 30--$45,293.6; December 31--$41,206.5) ...... 47,832.0 42,046.3
Equity securities:
Available-for-sale--at fair value
(cost: September 30--$285.9; December 31--$307.5) ............ 375.1 349.6
Trading securities--at fair value
(cost: September 30--$0.1; December 31--$0.3) ................ 0.4 0.7
Mortgage loans on real estate ..................................... 10,625.7 10,296.5
Real estate ....................................................... 194.8 255.3
Policy loans ...................................................... 2,012.5 2,014.2
Short-term investments ............................................ 10.9 137.3
Other invested assets ............................................. 3,002.0 2,839.1
--------- ---------
Total Investments ........................................ 65,603.9 59,666.0
Cash and cash equivalents ......................................... 1,316.9 897.0
Accrued investment income ......................................... 881.5 743.2
Premiums and accounts receivable .................................. 103.7 114.1
Deferred policy acquisition costs ................................. 3,380.0 3,352.6
Reinsurance recoverable ........................................... 3,881.4 2,958.9
Other assets ...................................................... 2,794.0 2,660.3
Separate account assets ........................................... 18,427.2 17,414.9
--------- ---------
Total Assets ............................................. $96,388.6 $87,807.0
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
September 30,
2003 December 31,
(unaudited) 2002
-----------------------------
(in millions)
Liabilities and Shareholder's Equity
Liabilities
Future policy benefits .................................................... $ 37,564.7 $ 34,233.8
Policyholders' funds ...................................................... 22,356.0 22,571.0
Consumer notes ............................................................ 1,059.6 290.2
Unearned revenue .......................................................... 389.7 368.9
Unpaid claims and claim expense reserves .................................. 165.2 160.7
Dividends payable to policyholders ........................................ 473.4 463.0
Short-term debt ........................................................... 126.2 99.5
Long-term debt ............................................................ 694.4 703.9
Income taxes .............................................................. 1,640.9 925.0
Other liabilities ......................................................... 5,774.9 4,397.3
Separate account liabilities .............................................. 18,427.2 17,414.9
---------- ----------
Total Liabilities ................................................ 88,672.2 81,628.2
Minority interest ......................................................... 5.1 7.3
Commitments and contingencies - Note 5
Shareholder's Equity
Common stock, $10,000 par value; 1,000 shares authorized and outstanding .. 10.0 10.0
Additional paid in capital ................................................ 4,763.2 4,763.2
Retained earnings ......................................................... 1,528.0 956.1
Accumulated other comprehensive income .................................... 1,410.1 442.2
---------- ----------
Total Shareholder's Equity ....................................... 7,711.3 6,171.5
---------- ----------
Total Liabilities and Shareholder's Equity ....................... $ 96,388.6 $ 87,807.0
========== ==========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------- -------------------
(in millions)
Revenues
Premiums ...................................................................... $ 475.1 $ 482.9 $1,431.8 $1,432.2
Universal life and investment-type product fees ............................... 155.6 160.7 463.7 459.0
Net investment income ......................................................... 931.5 878.4 2,806.9 2,654.9
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs, amounts credited to
participating pension contractholders and the policyholder dividend
obligation ($(35.4) and $25.8 for the three months ended September 30,
2003 and 2002 and $(35.9) and $(9.1) for the nine months ended September
30, 2003 and 2002, respectively) ........................................... (62.7) (37.8) 121.0 (249.3)
Investment management revenues, commissions and other fees .................... 129.3 124.6 370.9 405.9
Other revenue ................................................................. 61.6 54.2 189.0 173.7
-------- -------- -------- --------
Total revenues .......................................................... 1,690.4 1,663.0 5,383.3 4,876.4
Benefits and Expenses
Benefits to policyholders, excluding amounts related to net realized
investment and other gains (losses) credited to participating pension
contractholders and the policyholder dividend obligation ($(29.7) and
$10.9 for the three months ended September 30, 2003 and 2002 and $(42.6)
and $0.4 for the nine months ended September 30, 2003 and 2002,
respectively) .............................................................. 935.1 937.6 2,804.1 2,806.1
Other operating costs and expenses ............................................ 348.9 286.2 1,018.4 920.6
Amortization of deferred policy acquisition costs, excluding
amounts related to net realized investment and other gains (losses)
($(5.7) and $14.9 for the three months ended September 30, 2003 and
2002 and $6.7 and $(9.5) for the nine months ended September 30,
2003 and 2002, respectively) ............................................... 57.5 135.1 188.8 257.6
Dividends to policyholders .................................................... 151.6 135.7 421.6 417.5
-------- -------- -------- --------
Total benefits and expenses ............................................. 1,493.1 1,494.6 4,432.9 4,401.8
-------- -------- -------- --------
Income before income taxes ....................................................... 197.3 168.4 950.4 474.6
-------- -------- -------- --------
Income taxes ..................................................................... 39.6 35.1 264.0 107.9
-------- -------- -------- --------
Net income ....................................................................... $ 157.7 $ 133.3 $ 686.4 $ 366.7
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
-------------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at July 1, 2002......................... $10.0 $4,763.2 $ 730.6 $ 274.4 $5,778.2 1,000
Comprehensive income:
Net income................................. 133.3 133.3
Other comprehensive income, net of tax:
Net unrealized gains (losses)............ (108.4) (108.4)
Net accumulated gains (losses) on cash
flow hedges............................ 161.6 161.6
Foreign currency translation
adjustment............................. (0.2) (0.2)
Minimum pension liability................ 1.2 1.2
---------------
Comprehensive income............................ 187.5
-------------------------------------------------------------------------------
Balance at September 30, 2002................... $10.0 $4,763.2 $ 863.9 $ 328.6 $5,965.7 1,000
===============================================================================
Balance at July 1, 2003........................ $10.0 $4,763.2 $1,384.8 $1,502.7 $7,660.7 1,000
Comprehensive income:
Net income................................. 157.7 157.7
Other comprehensive income, net of tax:
Net unrealized gains (losses)............ (55.8) (55.8)
Net accumulated gains (losses) on cash
flow hedges............................ (38.3) (38.3)
Foreign currency translation
adjustment............................. (0.1) (0.1)
Minimum pension liability................ 1.6 1.6
--------------
Comprehensive income............................ 65.1
Dividend paid to parent company................. (14.5) (14.5)
-------------------------------------------------------------------------------
Balance at September 30, 2003.................. $10.0 $4,763.2 $1,528.0 $1,410.1 $7,711.3 1,000
===============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME-(CONTINUED)
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
----------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at January 1, 2002................... $ 10.0 $ 4,763.4 $ 608.2 $ 225.6 $5,607.2 1,000
Demutualization transactions................. (0.2) (0.2)
Comprehensive income:
Net income.............................. 366.7 366.7
Other comprehensive income, net of tax:
Net unrealized gains (losses)......... (78.1) (78.1)
Net accumulated gains (losses) on
cash flow hedges.................... 177.4 177.4
Minimum pension liability............. 3.7 3.7
--------------
Comprehensive income......................... 469.7
Dividend paid to parent company.............. (111.0) (111.0)
----------------------------------------------------------------------------
Balance at September 30, 2002................ $ 10.0 $ 4,763.2 $ 863.9 $ 328.6 $5,965.7 1,000
============================================================================
Balance at January 1, 2003................... $ 10.0 $ 4,763.2 $ 956.1 $ 442.2 $6,171.5 1,000
Comprehensive income:
Net income.............................. 686.4 686.4
Other comprehensive income, net of tax:
Net unrealized gains (losses)......... 889.0 889.0
Net accumulated gains (losses) on
cash flow hedges.................... 74.0 74.0
Foreign currency translation
adjustment.......................... (0.1) (0.1)
Minimum pension liability............. 5.0 5.0
--------------
Comprehensive income......................... 1,654.3
Dividend paid to parent company.............. (114.5) (114.5)
----------------------------------------------------------------------------
Balance at September 30, 2003............... $ 10.0 $ 4,763.2 $1,528.0 $1,410.1 $7,711.3 1,000
============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2003 2002
------------------------
(in millions)
Cash flows from operating activities:
Net income ......................................................................... $ 686.4 $ 366.7
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discount - fixed maturities ..................................... 4.7 (61.3)
Net realized investment and other (gains) losses ................................ (121.0) 249.3
Change in deferred policy acquisition costs ..................................... (200.4) (118.1)
Depreciation and amortization ................................................... 32.4 37.9
Net cash flows from trading securities .......................................... 0.3 0.6
Increase in accrued investment income ........................................... (138.3) (62.1)
Decrease (increase) in premiums and accounts receivable ......................... 10.4 (111.9)
Increase in other assets and other liabilities, net ............................. (335.5) (107.2)
Increase in policy liabilities and accruals, net ................................ 1,292.8 1,498.2
Increase in income taxes ........................................................ 197.6 29.1
---------- ----------
Net cash provided by operating activities ................................ 1,429.4 1,721.2
Cash flows from investing activities:
Sales of:
Fixed maturities available-for-sale ........................................... 8,317.6 3,136.7
Equity securities available-for-sale .......................................... 129.4 289.1
Real estate ................................................................... 85.4 68.4
Short-term investments and other invested assets .............................. 155.5 88.8
Home Office properties ........................................................ 887.6 --
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity ............................................. 190.9 130.0
Fixed maturities available-for-sale ........................................... 2,697.6 2,157.5
Short-term investments and other invested assets .............................. 337.3 145.0
Mortgage loans on real estate ................................................. 882.0 882.2
Purchases of:
Fixed maturities held-to-maturity ............................................. (77.3) (11.8)
Fixed maturities available-for-sale ........................................... (14,731.7) (9,392.8)
Equity securities available-for-sale .......................................... (91.1) (91.3)
Real estate ................................................................... (24.6) (8.3)
Short-term investments and other invested assets .............................. (807.3) (537.8)
Mortgage loans on real estate issued ............................................. (1,277.4) (1,456.2)
Net cash received related to acquisition of business ............................ 93.7 --
Other, net ....................................................................... (152.1) (139.1)
---------- ----------
Net cash used in investing activities ....................................... $ (3,384.5) $ (4,739.6)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
7
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Nine Months Ended
September 30,
2003 2002
---------- ----------
(in millions)
Cash flows from financing activities:
Dividends paid to parent .......................................................... $ (100.0) $ (111.0)
Universal life and investment-type contract deposits .............................. 6,807.5 6,984.2
Universal life and investment-type contract maturities and withdrawals ............ (5,117.3) (4,128.6)
Issuance of consumer notes ........................................................ 769.4 --
Issuance of short-term debt ....................................................... 148.4 69.0
Repayment of short-term debt ...................................................... (127.9) (91.6)
Repayment of long-term debt ....................................................... (5.1) (20.6)
---------- ----------
Net cash provided by financing activities ..................................... 2,375.0 2,701.4
---------- ----------
Net increase (decrease) in cash and cash equivalents .......................... 419.9 (317.0)
Cash and cash equivalents at beginning of year ................................ 897.0 1,025.3
---------- ----------
Cash and cash equivalents at end of period .................................... $ 1,316.9 $ 708.3
========== ==========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
8
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Business
John Hancock Life Insurance Company (the Company) is a diversified financial
services organization that provides a broad range of insurance and investment
products and investment management and advisory services. The Company is a
wholly owned subsidiary of John Hancock Financial Services, Inc. (JHFS, or the
Parent). As outlined in Note 10 - Significant Event, JHFS has entered into a
merger agreement with Manulife Financial Corporation (Manulife) which is
expected to close early in the second quarter of 2004, pending necessary
regulatory and shareholder approvals.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, these unaudited consolidated financial statements contain all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair presentation of the Company's financial position and results of
operations. Operating results for the three and nine month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. These unaudited consolidated
financial statements should be read in conjunction with the Company's annual
audited financial statements as of December 31, 2002 included in the Company's
Form 10-K for the year ended December 31, 2002 filed with the United States
Securities and Exchange Commission (hereafter referred to as the Company's 2002
Form 10-K). All of the Company's United States Securities and Exchange
Commission filings are available on the internet at www.sec.gov, under the name
Hancock John Life.
The balance sheet at December 31, 2002, presented herein, has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The acquisition described under the table below was recorded under the purchase
method of accounting and, accordingly, the operating results have been included
in the Company's consolidated results of operations from the date of
acquisition. The purchase price was allocated to the assets acquired and the
liabilities assumed based on estimated fair values, with the excess of the
applicable purchase price over the estimated fair values, if any, recorded as
goodwill. This acquisition was made by the Company in execution of its plan to
acquire businesses that have strategic value, meet its earnings requirements and
advance the growth of its current businesses.
The disposal described under the table below was conducted in order to execute
the Company's strategy to focus resources on businesses in which it can have a
leadership position. The table below presents actual and proforma data, for
comparative purposes, of revenue and net income for the periods indicated, to
demonstrate the proforma effect of the acquisition and of the disposal as if
they both occurred on January 1, 2002.
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
Proforma 2003 Proforma 2002 Proforma 2003 Proforma 2002
--------------------------------------------------------------------------------------------------------
(in millions)
Revenue ............ $1,690.4 $1,690.4 $1,632.5 $1,663.0 $5,338.5 $5,383.3 $4,780.4 $4,876.4
Net income ......... $ 157.7 $ 157.7 $ 132.6 $ 133.3 $ 683.6 $ 686.4 $ 366.1 $ 366.7
Acquisition:
On December 31, 2002, the Company acquired the fixed universal life insurance
business of Allmerica Financial Corporation (Allmerica) through a reinsurance
agreement for approximately $104.3 million. There was no impact on the Company's
results of operations from the acquired insurance business during 2002.
Disposal:
On June 19, 2003, the Company agreed to sell its group life insurance business
through a reinsurance agreement with Metropolitan Life Insurance Company, Inc
(MetLife). The Company is ceding all activity after May 1, 2003 to MetLife.
9
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
The transaction was recorded as of May 1, 2003, and closed November 4, 2003.
Stock-Based Compensation
The Company has two stock-based compensation plans, which are described more
fully in the Company's 2002 Form 10-K. For the periods covered by this report,
the Company applies the recognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for stock-based
compensation grants made prior to January 1, 2003. No compensation expense is
reflected in net income for stock option grants to employees and non-employee
board members of the Company made prior to January 1, 2003. All options granted
under those plans had an exercise price equal to the market value of JHFS common
stock on the date of grant. Prior to January 1, 2003, the Company recognized
compensation expense at the time of the grant or over the vesting period for
grants of non-vested stock to employees and non-employee board members and
grants of stock options to non-employee general agents and has continued this
practice. The Company adopted the fair value provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as of January 1, 2003 and is utilizing the transition provisions
described in SFAS No. 148, on a prospective basis to awards granted after
December 31, 2002. Adoption of the fair value provisions of SFAS No. 123 will
have a material impact on the Company's net income. The Company has adopted the
disclosure provisions of SFAS No. 148. The following table illustrates the pro
forma effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, to all stock-based employee
compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------------- -----------------------
(in millions)
Net income, as reported...................................... $ 157.7 $ 133.3 $ 686.4 $ 366.7
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects........ 2.9 1.2 15.0 4.1
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects....................................... 8.8 13.4 34.8 41.1
------- ------- ------- -------
Proforma net income ......................................... $ 151.8 $ 121.1 $ 666.6 $ 329.7
======= ======= ======= =======
Recent Accounting Pronouncements
Statement of Position 03-1 - Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long Duration Contracts and for Separate Accounts
On July 7, 2003, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long Duration Contracts and for Separate Accounts" (SOP 03-1).
SOP 03-1 provides guidance on a number of topics unique to insurance
enterprises, including separate account presentation, interest in separate
accounts, gains and losses on the transfer of assets from the general account to
a separate account, liability valuation, returns based on a contractually
referenced pool of assets or index, accounting for contracts that contain death
or other insurance benefit features, accounting for reinsurance and other
similar contracts, accounting for annuitization benefits, and sales inducements
to contract holders.
SOP 03-1 will be effective for the Company's financial statements on January 1,
2004. The Company is currently evaluating the impact of adopting SOP 03-1 on its
consolidated financial position, results of operations and cash flows.
Statement of Financial Accounting Standards No. 150 - Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (SFAS No. 150).
SFAS No.150 changes the accounting for certain financial instruments that, under
previous guidance, issuers could account
10
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
for as equity. It requires that certain financial instruments be classified as
liabilities on issuer balance sheets, including those instruments that are
issued in shares and are mandatorily redeemable, those instruments that are not
issued in shares but give the issuer an obligation to repurchase previously
issued equity shares, and certain financial instruments that give the issuer the
option of settling an obligation by issuing more equity shares. The adoption of
SFAS No. 150 had no impact on the Company's consolidated financial position,
results of operations or cash flows.
SFAS No. 149 - Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). In particular,
SFAS No. 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative, clarifies when a derivative
contains a financing component, amends the definition of an underlying to
conform it to language used in FASB Interpretation No. 45--"Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," and amends certain other existing
pronouncements. SFAS No. 149 was effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of SFAS No. 149 had no impact on the Company's
consolidated financial position, results of operations or cash flows.
FASB Derivative Implementation Group Issue No. 36--Embedded Derivatives:
Bifurcation of a Debt Instrument that Incorporates Both Interest Rate Risk and
Credit Rate Risk Exposures that are Unrelated or Only Partially Related to the
Creditworthiness of the Issuer of that Instrument
In April 2003, the FASB's Derivative Implementation Group (DIG) released SFAS
No. 133 Implementation Issue No. 36, "Embedded Derivatives: Bifurcation of a
Debt Instrument that Incorporates Both Interest Rate Risk and Credit Rate Risk
Exposures that are Unrelated or Only Partially Related to the Creditworthiness
of the Issuer of that Instrument" (DIG B36). DIG B36 addresses whether SFAS
No.133 requires bifurcation of a debt instrument into a debt host contract and
an embedded derivative if the debt instrument incorporates both interest rate
risk and credit risk exposures that are unrelated or only partially related to
the creditworthiness of the issuer of that instrument. Under DIG B36, modified
coinsurance and coinsurance with funds withheld reinsurance agreements as well
as other types of receivables and payables where interest is determined by
reference to a pool of fixed maturity assets or a total return debt index are
examples of arrangements containing embedded derivatives requiring bifurcation.
The effective date of the implementation guidance is October 1, 2003.
On October 1, 2003, the Company adopted DIG B36 and has determined that certain
of its reinsurance receivables/payables and insurance products contain embedded
derivatives requiring bifurcation, specifically in its modified coinsurance
agreements and in its participating pension contracts. The adoption of DIG B36,
with respect to the Company's modified coinsurance agreements, decreased net
income with a cumulative effect of accounting charge of $113.5 million (net of
tax of $61.1 million), of which $103.0 million (net of tax of $55.4 million)
related to reinsurance treaties with an affiliated reinsurance company as of
October 1, 2003. The Company is in the process of determining the impact of the
adoption of DIG B36 on its participating pension contracts. Although permitted
by DIG B36, no reclassification of securities from the held-to-maturity or
available-for-sale categories to the trading category was made.
FASB Interpretation 46 - Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 as deferred by FASB Staff Position No. FIN 46-6
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51," (FIN 46) which clarifies
the consolidation accounting guidance in Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," (ARB No. 51) as it applies to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest, or do not have sufficient equity at risk for the
entities to finance their activities without additional subordinated financial
support from other parties. Such entities are known as variable interest
entities (VIEs).
Controlling financial interests of a VIE are identified by the exposure of a
party to the VIE to a majority of either the expected losses or residual rewards
of the VIE, or both. Such parties are primary beneficiaries of the VIEs and FIN
46
11
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
requires that the primary beneficiary of a VIE consolidate the VIE. FIN 46 also
requires new disclosures for significant relationships with VIEs, whether or not
consolidation accounting is either used or anticipated.
Additional liabilities recognized as a result of consolidating VIEs with which
the Company is involved would not represent additional claims on the general
assets of the Company; rather, they would represent claims against additional
assets recognized by the Company as a result of consolidating the VIEs.
Conversely, additional assets recognized as a result of consolidating these VIEs
would not represent additional assets which the Company could use to satisfy
claims against its general assets, rather they would be used only to settle the
additional liabilities recognized as a result of consolidating these VIEs.
However, in accordance with FIN 46, it is possible that if the Company
consolidates some of these VIEs, the Company may, as a result, report lower
consolidated net income and resulting lower consolidated shareholder's equity in
the short or intermediate term even though the Company's shareholders do not
have direct economic exposure to the additional VIE losses recognized. These
losses would ultimately reverse when the Company's status as primary beneficiary
lapses. Refer to Note 4 -- Relationships with Variable Interest Entities below,
and Note 1 -- Summary of Significant Accounting Policies in the Company's 2002
Form 10-K for a more complete discussion of the Company's relationships with
VIEs, their assets and liabilities, and the Company's maximum exposure to loss
as a result of its involvement with them.
In October 2003, the FASB directed the FASB staff to issue FASB Staff Position
No. FIN 46-6 (FSP FIN 46-6). FSP FIN 46-6 defers the effective date of FIN 46
for interests held by public entities in VIEs or potential VIEs dating from
before February 1, 2003. The consolidation requirements of FIN 46 for these
interests are now scheduled to be effective on December 31, 2003. The
consolidation requirements of FIN 46 remain applicable to VIEs created after
January 31, 2003 and to VIEs in which an enterprise obtains an interest after
that date. The Company has not entered into primary benefit relationships with
any VIEs after January 31, 2003.
The Company will adopt FIN 46 on December 31, 2003. The Company will apply the
provisions of FIN 46 prospectively, and is currently estimating the impact on
its consolidated financial position, results of operations and cash flows of
consolidating those VIEs for which the Company is the primary beneficiary.
SFAS No. 148 - Accounting for Stock-Based Compensation--Transition and
Disclosure, an amendment of FASB Statement No. 123
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation which is an optional alternative method of accounting presented in
SFAS No. 123, "Accounting for Stock Based Compensation." In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148's amendment of the transition and annual
disclosure provisions of SFAS No. 123 is effective for fiscal years ending after
December 2002. The Company adopted the fair value provisions of SFAS No. 123 on
January 1, 2003 and utilized the transition provisions described in SFAS No.
148, on a prospective basis to awards granted after December 31, 2002 for its
participation in JHFS' stock compensation plans. In the first nine months of
2003 JHFS granted 630,000 stock options to senior management of the Company and
recorded $0.9 million, net of tax of $0.4 million, of related compensation
expense. The Company has adopted the disclosure provisions of SFAS No. 148, see
Note 1--Summary of Significant Accounting Policies, Stock-Based Compensation
above.
For the periods prior to January 1, 2003, Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" was applied. APB No. 25
provides guidance on how to account for the issuance of stock and stock options
to employees. The Company adopted APB No. 25 upon its demutualization and IPO
effective February 1, 2000. Compensation cost for stock options, if any, is
measured as the excess of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Compensation cost is recognized over the requisite vesting
12
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
periods based on market value on the date of grant. APB No. 25 was amended by
SFAS No. 123 to require pro forma disclosures of net income and earnings per
share as if a "fair value" based method was used.
FASB Interpretation No. 45 - Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires certain types of guarantees to
be recorded by the guarantor as liabilities at fair value. This differs from
previous practice, which generally required recognition of a liability only when
a potential loss was deemed to be probable and was reasonably estimable in
amount. FIN 45 does not apply to guarantees that are accounted for under
existing insurance accounting principles. FIN 45 requires more extensive
disclosures of certain other types of guarantees, including certain categories
of guarantees which are already accounted for under specialized accounting
principles, such as SFAS No. 133, even when the likelihood of making any
payments under the guarantee is remote.
Disclosure requirements are effective for financial statements for interim or
annual periods ending after December 31, 2002. Refer to the Note 1 - Summary of
Significant Accounting Policies and Note 12 - Commitments, Guarantees and
Contingencies in Company's 2002 Form 10-K. Initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of FIN 45 had no impact
on the Company's consolidated financial position, results of operations or cash
flows.
SFAS No. 146 - Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires recognition of a
liability for exit or disposal costs, including restructuring costs, when the
liability is incurred rather than at the date of an entity's commitment to a
formal plan of action. SFAS No. 146 applies to one-time termination benefits
provided to current employees that are involuntarily terminated under the terms
of a one-time benefit arrangement. An ongoing benefit arrangement is presumed to
exist if a company has a past practice of providing similar benefits. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 had no impact on the Company's
consolidated financial position, results of operations or cash flows.
Note 2 -- Related Party Transactions
Certain directors of the Company are members or directors of other entities that
periodically perform services for or have other transactions with the Company.
Such transactions are either subject to bidding procedures or are otherwise
entered into on terms comparable to those that would be available to unrelated
third parties and are not material to the Company's results of operations,
financial condition, or liquidity.
The Company provides JHFS, its parent, with personnel, property, and facilities
in carrying out certain of its corporate functions. The Company annually
determines a fee (the parent company service fee) for these services and
facilities based on a number of criteria, which are periodically revised to
reflect continuing changes in the Company's operations. The parent company
service fee is included in other operating costs and expenses within the
Company's income statements. The Company charged JHFS service fees of $3.9
million and $5.3 million for the three month periods ended September 30, 2003
and 2002, respectively, and $15.0 million and $17.1 million for the nine month
periods ended September 30, 2003 and 2002, respectively. As of September 30,
2003, JHFS was current in its payments to the Company related to these services.
The Company provides certain administrative and asset management services to its
employee benefit plans (the Plans). Fees paid to the Company by the Plans for
these services were $1.4 million and $1.8 million for the three month periods
ended September 30, 2003 and 2002, respectively, and $4.0 million and $5.4
million for the nine month periods ended September 30, 2003 and 2002,
respectively.
JHFS pays a portion of certain vendor expenses on behalf of the Company which
are then reimbursed by the Company to JHFS. During the three and nine month
periods ended September 30, 2003, these reimbursements by the Company to JHFS
were $14.7 million.
During the first nine months of 2003, the Company paid $24.8 million in premiums
to an affiliate, John Hancock Insurance Company of Vermont (JHIC of Vermont) for
certain insurance services. All of these were in Trust Owned Health Insurance
13
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Related Party Transactions - (Continued)
(TOHI) premiums, a funding vehicle for postretirement medical benefit plans,
which offers customers an insured medical benefit-funding program in conjunction
with a broad range of investment options.
The Company has reinsured certain portions of its long term care insurance,
non-traditional life insurance and group pension businesses with John Hancock
Reassurance Company, Ltd. of Bermuda (JHReCo), an affiliate and wholly owned
subsidiary of JHFS. The Company entered into these reinsurance contracts in
order to facilitate its capital management process. These reinsurance contracts
are primarily written on a funds withheld basis where the related financial
assets remain invested at the Company. As a result, the Company recorded a
liability for coinsurance amounts withheld from JHReCo of $2,174.5 million and
$1,631.5 million at September 30, 2003 and December 31, 2002, respectively,
which are included with other liabilities in the consolidated balance sheets and
recorded reinsurance recoverable from JHReCo of $2,491.4 million and $2,043.7
million at September 30, 2003 and December 31, 2002, respectively, which are
included with other reinsurance recoverables on the consolidated balance sheets.
Premiums ceded to JHReCo were $216.8 million and $113.7 for the three month
periods ended September 30, 2003 and 2002, respectively, and $500.2 million and
$488.8 million for the nine month periods ended September 30, 2003 and 2002,
respectively.
In the first quarter of 2002, the Company began reinsuring certain portions of
its group pension businesses with an affiliate, JHIC of Vermont. The Company
entered into these reinsurance contracts in order to facilitate its capital
management process. These reinsurance contracts are primarily written on a funds
withheld basis where the related financial assets remain invested at the
Company. As a result, the Company recorded a liability for coinsurance amounts
withheld from JHIC of Vermont of $143.8 million and $98.6 million as of
September 30, 2003 and December 31, 2002, respectively, which is included with
other liabilities in the consolidated balance sheets. At September 30, 2003 and
December 31, 2002, the Company had not recorded any reinsurance recoverable from
JHIC of Vermont. Reinsurance recoverable is typically recorded with other
reinsurance recoverables on the consolidated balance sheet. Premiums ceded by
the Company to JHIC of Vermont were $0.2 million for both the three month
periods ended September 30, 2003 and 2002, respectively, and $0.5 million and
$0.6 million for the nine month periods ended September 30, 2003 and 2002,
respectively.
Note 3 -- Segment Information
In the first quarter of 2003, the Company implemented organizational changes
within the Corporate and Other Segment which resulted in the reclassification of
2002 results for the Federal long-tern care insurance business to the Protection
Segment. The reclassification associated with the Federal long-term care
insurance business has no impact on segment after- tax operating income, or net
income of the business. The reclassification increased Protection Segment
after-tax operating income and decreased Corporate and Other Segment after-tax
operating income by $0.2 million and $0.5 million for the three and nine month
periods ended September 30, 2002.
The Company operates in the following five business segments: two segments
primarily serve retail customers, two segments serve institutional customers and
our fifth segment is the Corporate and Other Segment, which includes our
international operations, the corporate account and several run-off businesses.
Our retail segments are the Protection Segment and the Asset Gathering Segment.
Our institutional segments are the Guaranteed and Structured Financial Products
Segment (G&SFP) and the Investment Management Segment. For additional
information about the Company's business segments please refer to the Company's
2002 Form 10-K.
14
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
The following table summarizes selected financial information by segment for the
periods and dates indicated, and reconcile segment revenues and segment
after-tax operating income to amounts reported in the unaudited consolidated
statements of income. Included in the Protection Segment for all periods
presented are the assets, liabilities, revenues and expenses of the closed
block. For additional information on the closed block, see Note 6 - Closed Block
in the notes to the unaudited consolidated financial statements and the related
footnote in the Company's 2002 Form 10-K.
Amounts reported as segment adjustments in the tables below primarily relate to:
(i) certain net realized investment and other gains (losses), net of
related amortization adjustment for deferred policy acquisition
costs, amounts credited to participating pension contractholder
accounts and policyholder dividend obligation (the adjustment for
net realized investment and other gains (losses) excludes gains and
losses from mortgage securitizations because management views the
related gains and losses as an integral part of the core business of
those operations),
(ii) restructuring costs related to reducing staff in the home office and
terminating certain operations outside the home office in 2002,
costs of this nature are not reported as a segment adjustment for
2003, and
(iii) benefits to policyholders and expenses incurred relating to the
settlement of a class action lawsuit against the Company involving a
dispute regarding disclosure of costs on various modes of life
insurance premium payment.
15
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------------------------------------------------------------------------------
(in millions)
As of or for the three months ended
September 30, 2003
Revenues:
Revenues from external customers .......... $ 496.2 $ 131.7 $ 14.6 $ 24.7 $ 153.7 $ 820.9
Net investment income ..................... 355.0 179.2 399.4 2.7 (4.8) 931.5
Inter-segment revenues .................... -- 0.3 -- 4.5 (4.8) --
-------------------------------------------------------------------------------
Segment revenues .......................... 851.2 311.2 414.0 31.9 144.1 1,752.4
Net realized investment and
other gains (losses), net ............... (3.8) (11.4) (44.3) -- (2.5) (62.0)
-------------------------------------------------------------------------------
Revenues .................................. $ 847.4 $ 299.8 $ 369.7 $ 31.9 $ 141.6 $ 1,690.4
===============================================================================
Net Income:
Segment after-tax operating income ........ $ 92.4 $ 49.5 $ 63.7 $ 5.6 $ (12.7) $ 198.5
Net realized investment and
other gains (losses), net ............... (2.6) (7.2) (26.7) -- (4.3) (40.8)
-------------------------------------------------------------------------------
Net income ................................ $ 89.8 $ 42.3 $ 37.0 $ 5.6 $ (17.0) $ 157.7
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method ...... $ 5.5 $ 2.9 $ 8.9 $ -- $ 13.3 $ 30.6
Carrying value of investments
accounted for by the equity
method .................................. 313.5 215.5 565.0 14.0 667.7 1,775.7
Amortization of deferred policy
acquisition costs, excluding
amounts related to net realized
investment and other gains
(losses) ................................ 31.7 25.4 0.5 -- (0.1) 57.5
Segment assets ............................ 35,253.3 18,473.8 37,089.3 2,654.4 2,917.8 96,388.6
16
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------------------------------------------------------------------------------
(in millions)
As of or for the three months ended
September 30, 2002
Revenues:
Revenues from external customers ........ $ 483.4 $ 136.6 $ 18.4 $ 21.6 $ 163.3 $ 823.3
Net investment income ................... 329.5 147.9 427.4 3.3 (29.7) 878.4
Inter-segment revenues .................. -- 0.8 -- 5.6 (6.4) --
-------------------------------------------------------------------------------
Segment revenues ........................ 812.9 285.3 445.8 30.5 127.2 1,701.7
Net realized investment and other
gains (losses), net ................... (19.8) 52.6 (74.8) -- 3.3 (38.7)
-------------------------------------------------------------------------------
Revenues ................................ $ 793.1 $ 337.9 $ 371.0 $ 30.5 $ 130.5 $ 1,663.0
===============================================================================
Net Income:
Segment after-tax operating income ...... $ 65.8 $ 14.6 $ 68.3 $ 4.5 $ 7.3 $ 160.5
Net realized investment and other
gains (losses), net ................... (12.2) 34.5 (47.4) (0.1) 2.0 (23.2)
Restructuring charges ................... (0.6) (3.1) -- -- (0.3) (4.0)
-------------------------------------------------------------------------------
Net income .............................. $ 53.0 $ 46.0 $ 20.9 $ 4.4 $ 9.0 $ 133.3
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ................................ $ 2.9 $ 0.8 $ 5.9 $ (0.1) $ (3.0) $ 6.5
Carrying amount of investments
accounted for under the equity
method ................................ 190.2 120.6 351.6 11.8 619.8 1,294.0
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) .............. 67.8 66.9 0.5 -- (0.1) 135.1
Segment assets .......................... 30,140.8 15,350.0 33,903.9 2,258.0 2,725.8 84,378.5
17
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------------------------------------------------------------------------------
(in millions)
As of or for the nine months ended
September 30, 2003
Revenues:
Revenues from external customers ........ $ 1,458.6 $ 406.4 $ 48.2 $ 74.6 $ 476.4 $ 2,464.2
Net investment income ................... 1,049.6 522.1 1,239.0 14.4 (18.2) 2,806.9
Inter-segment revenues .................. -- 0.9 -- 18.6 (19.5) --
-------------------------------------------------------------------------------
Segment revenues ........................ 2,508.2 929.4 1,287.2 107.6 438.7 5,271.1
Net realized investment and other
gains (losses), net ................... (9.3) (28.9) (167.8) -- 318.2 112.2
-------------------------------------------------------------------------------
Revenues ................................ $ 2,498.9 $ 900.5 $ 1,119.4 $ 107.6 $ 756.9 $ 5,383.3
===============================================================================
Net Income:
Segment after-tax operating income ...... $ 264.6 $ 140.7 $ 208.1 $ 22.7 $ (21.5) $ 614.6
Net realized investment and other
gains (losses), net ................... (6.1) (18.5) (104.0) -- 200.4 71.8
-------------------------------------------------------------------------------
Net income .............................. $ 258.5 $ 122.2 $ 104.1 $ 22.7 $ 178.9 $ 686.4
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ................................ $ 16.5 $ 8.1 $ 28.6 $ 3.9 $ 14.6 $ 71.7
Carrying amount of investments
accounted for using the equity
method ................................ 313.5 215.5 565.0 14.0 667.7 1,775.7
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) .............. 108.8 78.4 1.6 -- -- 188.8
Segment assets .......................... 35,253.3 18,473.8 37,089.3 2,654.4 2,917.8 96,388.6
18
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------------------------------------------------------------------------------
(in millions)
As of or for the nine months ended
September 30, 2002
Revenues:
Revenues from external customers ........ $ 1,419.1 $ 433.9 $ 49.5 $ 61.4 $ 508.8 $ 2,472.7
Net investment income ................... 976.0 418.9 1,275.6 10.9 (26.5) 2,654.9
Inter-segment revenues .................. -- 0.8 -- 22.1 (22.9) --
-------------------------------------------------------------------------------
Segment revenues ........................ 2,395.1 853.6 1,325.1 94.4 459.4 5,127.6
Net realized investment and other
gains (losses), net ................... (77.3) 8.2 (183.0) 0.6 0.3 (251.2)
-------------------------------------------------------------------------------
Revenues ................................ $ 2,317.8 $ 861.8 $ 1,142.1 $ 95.0 $ 459.7 $ 4,876.4
===============================================================================
Net Income:
Segment after-tax operating income ...... $ 215.7 $ 95.2 $ 204.5 $ 16.8 $ 21.6 $ 553.8
Net realized investment and other
gains (losses), net ................... (49.3) 6.5 (116.8) 0.4 -- (159.2)
Class action lawsuit .................... (18.7) -- -- -- (0.8) (19.5)
Restructuring charges ................... (4.7) (5.0) (0.5) (0.2) 2.0 (8.4)
-------------------------------------------------------------------------------
Net income .............................. $ 143.0 $ 96.7 $ 87.2 $ 17.0 $ 22.8 $ 366.7
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ................................ $ 12.4 $ 5.9 $ 24.7 $ -- $ 8.4 $ 51.4
Carrying amount of investments
accounted for using the equity
method ................................ 190.2 120.6 351.6 11.8 619.8 1,294.0
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) .............. 138.9 117.3 1.6 -- (0.2) 257.6
Segment assets .......................... 30,140.8 15,350.0 33,903.9 2,258.0 2,725.8 84,378.5
19
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities
The Company has relationships with various types of special purpose entities
(SPEs) and other entities, some of which are variable interest entities (VIEs)
in accordance with FASB Interpretation No. 46 - "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51" (FIN 46), as discussed in
Note 1--Summary of Significant Accounting Policies above. FIN 46's effective
date has been deferred until December 31, 2003 by the FASB for relationships
with VIEs, provided those relationships existed before February 1, 2003. The
Company has not entered into primary beneficiary relationships with any VIEs
after January 31, 2003. Presented below are discussions of the Company's
significant relationships with and certain summarized financial information for
these entities.
As explained in Note 1--Summary of Significant Accounting Policies above,
additional liabilities recognized as a result of consolidating VIEs in which the
Company is involved would not represent additional claims on the general assets
of the Company; rather, they would represent claims against additional assets
recognized by the Company as a result of consolidating the VIEs. These
additional liabilities are non-recourse to the general assets of the Company.
However, in accordance with FIN 46, it is possible that if the Company
consolidates some of these VIEs on December 31, 2003, the Company may, as a
result, report lower consolidated net income and resulting lower consolidated
shareholder's equity in the short or intermediate term even though the Company's
shareholder does not have direct economic exposure to the additional losses
recognized. These losses would ultimately reverse when the Company's status as
primary beneficiary of each consolidated VIE lapses.
Conversely, additional assets recognized as a result of consolidating these VIEs
would not represent additional assets which the Company could use to satisfy
claims against its general assets, rather they could be used only to settle
additional liabilities recognized as a result of consolidating the VIEs.
Collateralized Debt Obligations (CDOs). The Company acts as investment advisor
to certain asset backed investment vehicles, commonly known as collateralized
debt obligations (CDOs). The Company also invests in the debt and/or equity of
these CDOs, and in the debt and/or equity of CDOs managed by others. CDOs raise
capital by issuing debt and equity securities, and use their capital to invest
in portfolios of interest bearing securities. The returns from a CDO's portfolio
of investments are used by the CDO to finance its operations including paying
interest on its debt and paying advisory fees and other expenses. Any net income
or net loss is shared by the CDO's equity owners and, in certain circumstances
where we manage the CDO, positive investment experience is shared by the Company
through variable performance management fees. Any net losses are borne first by
the equity owners to the extent of their investments, and then by debt owners in
ascending order of subordination or in cases where the CDO attracts investors
through guaranteed insurance company separate accounts, the net losses are borne
by the issuer of separate account insurance policies. See the Company's 2002
Form 10-K for a discussion of separate account accounting.
If a CDO does not have sufficient controlling equity capital to finance its
expected losses at its origination, as calculated in accordance with FIN 46, the
CDO is defined as a VIE for purposes of determining and evaluating the
appropriate consolidation criteria. While all CDOs are not VIEs, in accordance
with FIN 46, where the Company is the primary beneficiary of the CDO, and the
CDO is a VIE, the Company will consolidate the financial statements of the CDO
into its own financial statements as of December 31, 2003.
In accordance with previously existing consolidation accounting principles, the
Company currently consolidates a CDO only when the Company owns a majority of
the CDO's equity, and will continue this practice for CDOs which are not deemed
to be VIEs. The Company has not yet finalized its determination of whether each
CDO should be considered a VIE, or if each is a VIE, whether the Company would
be the primary beneficiary of each.
Owners of debt or equity securities issued by CDOs advised by the Company have
no recourse to the Company's assets in the event of default by the CDO, unless
the Company has guaranteed such securities directly for investors through its
separate accounts. The Company's risk of loss from any CDO it manages, or in
which it invests, is limited to its investment in the CDO, if any, and
guarantees it made, if any. All of these guarantees are accounted for under
existing insurance industry accounting principles. The guaranteed assets are
currently recorded on the Company's consolidated balance sheets, at their fair
value, as separate account assets, with offsetting separate account liabilities.
The Company believes it is reasonably possible that it may consolidate one or
more of the CDOs which it manages, or will be required to disclose information
about them, or both, as of December 31, 2003, as a result of adopting FIN 46.
The tables below present summary financial data for CDOs which the Company
manages, and data relating to the Company's maximum exposure to loss as a result
of its relationships with them. The Company has determined that it is not the
primary beneficiary of any CDO in which it invests but does not manage and thus
will not be required to consolidate any of them and
20
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
is not disclosing any of their summary financial data or its exposure to them.
Credit ratings are provided by credit rating agencies, and relate to the debt
issued by the CDOs in which the Company has invested or guaranteed.
September 30, December 31,
2003 2002
------------------------------
(in millions)
Total size of Company-Managed CDOs
Total assets ............................... $5,522.9 $6,089.2
======== ========
Total debt ................................. $3,950.3 $3,574.1
Total other liabilities .................... 1,561.8 2,432.7
-------- --------
Total liabilities .......................... 5,512.1 6,006.8
Total equity ............................... 10.8 82.4
-------- --------
Total liabilities and equity ............... $5,552.9 $6,089.2
======== ========
Maximum exposure of the Company to losses September 30, December 31,
From Company-Managed CDOs 2003 2002
-------------------------------------
(in millions, except percents)
Investment in tranches of Company-Managed CDOs,
by credit rating (Moody's/Standard & Poors):
Aaa/AAA .............................................. $186.8 32.7% $380.2 53.8%
Aa/AA ................................................ 81.6 14.3 -- --
A/A .................................................. -- -- 14.5 2.1
Baa/BBB .............................................. 217.6 38.0 218.0 30.9
Ba/BB ................................................ 7.3 1.3 7.0 1.0
B/B- ................................................. -- -- 6.0 0.9
Caa/CCC .............................................. 12.2 2.1 -- --
Not rated (equity and separate account guarantees) ... 66.5 11.6 79.8 11.3
------ ------ ------ ------
Total Company exposure ............................... $572.0 100.0% $705.5 100.0%
====== ====== ====== ======
The Company has determined that each of its relationships with any CDO in which
it does not manage is not significant, and has therefore not included
information related to CDOs which it does not manage above.
Tax-Credit Housing Properties (the Properties). Since 1995, the Company has
received federal income tax benefits by investing in limited partnerships and
limited liability companies (the Properties) which own apartment properties that
qualify for low income housing and/or historic tax credits. The Company receives
Federal income tax credits and deductible losses in recognition of its
investments in each of the Properties for a period of ten years. In some cases,
the Company receives distributions from the Properties which are based on a
portion of the actual cash flows.
The Company invests in the Properties indirectly and, in some cases, directly.
The indirect investments are via investment funds (the Funds) which in turn
invest in Properties while the direct investments represent limited partnership
interests in other Properties. The Company also, in some cases, invests in
mortgages secured by the real estate holdings owned by the Properties. All of
the Funds but none of the Properties are currently consolidated into the
Company's financial statements in accordance with previously existing
consolidation accounting principles. The Properties are organized as limited
partnerships or limited liability companies. Each Property has a managing
general partner or managing member. The Company, directly or via the Funds, is
usually the sole limited partner or investor member in each Property, but it is
not the general partner or managing member of any Property. The Company is the
sole limited partner and also the general partner of each Fund. The Funds have
no borrowings.
The Properties typically obtain additional financial support by issuing
long-term debt in the form of mortgages secured by their real estate holdings,
or as unsecured debt. None of the debt has any recourse to the general assets of
the Company or of the Funds. The Company provides mortgages to some of the
properties. In the event of default by a Property on a mortgage,
21
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
the mortgage is subject to foreclosure and only the real estate holdings of the
Property would be available to satisfy the claims of the Property's lenders. No
Property with which the Company has been involved has undergone a mortgage
foreclosure. Conversely, the assets of the Properties are not available to
satisfy claims against the general assets of the Company. The Company currently
uses the equity method of accounting for its investments in the Properties. The
isolation of the assets and the liabilities of the Properties from the claimants
and assets of the Company, respectively, would continue in the event the Company
commenced consolidation accounting for any of the Properties.
The Company's maximum exposure to loss in relation to the Properties is limited
to its investment in the debt or equity of the Properties and any outstanding
equity and mortgage commitments.
The Company has determined that the Properties are VIEs in accordance with FIN
46 and that the Company is not the primary beneficiary of any of them. The
Company believes its relationships with the Properties, taken as a group, are
significant because of the VIE nature of the Properties, the size of the group,
and the relatively high proportionate Company ownership of each Property's
equity. The tables below present summary financial data for the Properties, and
data relating to the Company's maximum exposure to loss as a result of these
relationships.
September 30, December 31,
2003 2002
------------------------------
(in millions)
Total size of the Properties (1)
Total assets ................................... $ 941.9 $ 682.2
======== ========
Total debt ..................................... $ 557.1 $ 396.4
Total other liabilities ........................ 118.0 101.8
-------- --------
Total liabilities .............................. 675.1 498.2
Total equity ................................... 266.8 184.0
-------- --------
Total liabilities and equity ................... $ 941.9 $ 682.2
======== ========
(1) Certain data is reported with up to a one-year delay, due to the delayed
availability of audited financial statements of the Properties.
22
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
September 30, December 31,
2003 2002
------------------------------
(in millions)
Maximum exposure of the Company to losses from the Properties
Equity investment in the Properties (1) ........................ $ 240.2 $ 177.0
Outstanding equity capital commitments to the Properties ....... 112.7 139.4
Carrying value of mortgages for the Properties ................. 63.0 65.2
Outstanding mortgage commitments to the Properties ............. 5.1 5.1
-------- --------
Total Company exposure ......................................... $ 421.0 $ 386.7
======== ========
(1) Certain data is reported with up to a one-year delay, due to the delayed
availability of audited financial statements of the Properties.
Other Entities. The Company has a number of relationships with a disparate group
of entities (Other Entities), which result from the Company's direct investment
in the equity and/or debt of the Other Entities. Two are energy production,
distribution and marketing companies organized as limited partnerships, two are
investment funds organized as limited partnerships, and three are operating
companies organized as C-corps (a ski resort developer/operator, a step-van
manufacturer and a steel spring manufacturing company). Subsequent to the
Company's investment in their debt, each of the operating companies underwent
corporate reorganizations.
The Company is evaluating whether each of these entities is a VIE, and if so,
whether the Company is the primary beneficiary of each, but considers it
reasonably possible that it may consolidate each of these entities or be
required to disclose information about them, as a result of adopting FIN 46. The
Company has made no guarantees to any other parties involved with these
entities, and has outstanding capital commitments to both of the investment
funds. The Company's maximum exposure to loss as a result of its relationships
with these entities is limited to its investment in them and its outstanding
capital commitment.
The tables below present summary financial data for these Other Entities, and
data relating to the Company's maximum exposure to loss as a result of its
relationships with the Other Entities.
September 30, December 31,
2003 2002
-------------------------------
(in millions)
Total size of Other Entities (1)
Total assets .................................. $ 297.2 $ 291.7
======== ========
Total debt .................................... $ 311.5 309.3
Total other liabilities ....................... 66.2 61.9
-------- --------
Total liabilities ............................. 377.7 371.2
Total equity (2) .............................. (80.5) (79.5)
-------- --------
Total liabilities and equity .................. $ 297.2 $ 291.7
======== ========
(1) Certain data is reported with up to a six-month delay, due to the delayed
availability of audited financial statements of the Other Entities.
(2) The negative equity results primarily from the inclusion of the ski resort
operator mentioned previously. This entity has an accumulated deficit from
operations, but is current on its debt service and is cash flow positive.
The total equity shown above has not been adjusted to remove the portion
attributable to other shareholders, or adjusted to reflect unrealized
appreciation on the ski resort operator's real property.
23
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
September 30, December 31,
2003 2002
-----------------------------
(in millions)
Maximum exposure of the Company to losses from Other Entities (1)
Combined equity and debt investments in the Other Entities .............. $ 191.2 $ 171.0
Outstanding capital commitments to Other Entities ....................... 53.7 44.2
-------- --------
Total Company exposure .................................................. $ 244.9 $ 215.2
======== ========
(1) The Company's maximum exposure to loss is limited to its investments of
debt securities of these entities which are carried at fair value, and
equity securities of these entities which are valued using the equity
method of accounting, and the outstanding capital commitments to the
investment funds.
Note 5 -- Contingencies
Harris Trust
Since 1983, the Company has been involved in complex litigation known as Harris
Trust and Savings Bank, as Trustee of Sperry Master Retirement Trust No. 2 v.
John Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491). After
successive appeals to the Second Circuit and to the U.S. Supreme Court, the case
was remanded to the District Court and tried by a Federal District Court judge
in 1997. The judge issued an opinion in November 2000.
In that opinion the Court found against the Company and awarded the Trust
approximately $13.8 million in relation to this claim together with unspecified
additional pre-judgment interest on this amount from October 1988. The Court
also found against the Company on issues of liability valuation and ERISA law.
Damages in the amount of approximately $5.7 million, together with unspecified
pre-judgment interest from December 1996, were awarded on these issues. As part
of the relief, the judge ordered the removal of Hancock as a fiduciary to the
plan. On April 11, 2001, the Court entered a judgment against the Company for
approximately $84.9 million, which includes damages to the plaintiff,
pre-judgment interest, attorney's fees and other costs.
On May 14, 2001 the Company filed an appeal in this case. On August 20, 2002,
the Second Circuit Court of Appeals issued a ruling, affirming in part,
reversing in part, and vacating in part the District Court's judgment in this
case. The Second Circuit Court of Appeals' opinion overturned substantial
portions of the District Court's opinion, representing the vast majority of the
lower court's award of damages and fees, and sent the matter back to the
District Court for further proceedings. The matter remains in litigation, and no
final judgment has been entered.
The parties recently reached an agreement in principle with respect to
settlement of this matter. The amount of the proposed settlement has been taken
into account in reserves established in this and in previous quarters.
If the proposed settlement is not finalized and the litigation is not otherwise
settled, notwithstanding what the Company believes to be the merits of its
position in this case, if unsuccessful, the Company's ultimate liability,
including fees, costs and interest could have a material adverse impact on net
income. However, the Company does not believe that any such liability would be
material in relation to its financial position or liquidity.
Reinsurance Recoverable
On February 28, 1997, the Company sold a major portion of its group insurance
business to UNICARE Life & Health Insurance Company (UNICARE), a wholly owned
subsidiary of WellPoint Health Networks, Inc. The business sold included the
Company's group accident and health business and related group life business and
Cost Care, Inc., Hancock Association Services Group and Tri-State, Inc., all of
which were indirect wholly-owned subsidiaries of the Company. The Company
retained its group long-term care operations. The insurance business sold was
transferred to UNICARE through a 100% coinsurance agreement. The Company remains
liable to its policyholders to the extent that UNICARE does not meet its
contractual obligations under the coinsurance agreement.
24
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 5 -- Contingencies - (Continued)
Through the Company's group health insurance operations, the Company entered
into a number of reinsurance arrangements in respect of personal accident
insurance and the occupational accident component of workers compensation
insurance, a portion of which was originated through a pool managed by Unicover
Managers, Inc. Under these arrangements, the Company both assumed risks as a
reinsurer, and also passed 95% of these risks on to other companies. This
business had originally been reinsured by a number of different companies, and
has become the subject of widespread disputes. The disputes concern the
placement of the business with reinsurers and recovery of the reinsurance. The
Company is engaged in certain disputes, including a number of related legal
proceedings, in respect of this business. The risk to the Company is that other
companies that reinsured the business from the Company may seek to avoid their
reinsurance obligations. However, the Company believes that it has a reasonable
legal position in this matter. During the fourth quarter of 1999 and early 2000,
the Company received additional information about its exposure to losses under
the various reinsurance programs. As a result of this additional information and
in connection with global settlement discussions initiated in late 1999 with
other parties involved in the reinsurance programs, during the fourth quarter of
1999 the Company recognized a charge for uncollectible reinsurance of $133.7
million, after tax, as its best estimate of its remaining loss exposure. The
Company believes that any exposure to loss from this issue, in addition to
amounts already provided for as of September 30, 2003, would not be material to
the Company's financial position, results of operation or liquidity.
Reinsurance ceded contracts do not relieve the Company from its obligations to
policyholders. The Company remains liable to its policyholders for the portion
reinsured to the extent that any reinsurer does not meet its obligations for
reinsurance ceded to it under the reinsurance agreements. Failure of the
reinsurers to honor their obligations could result in losses to the Company;
consequently, estimates are established for amounts deemed or estimated to be
uncollectible. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentration of credit risk arising from similar characteristics
of the reinsurers.
Other Matters
In the normal course of its business operations, the Company is involved with
litigation from time to time with claimants, beneficiaries and others, and a
number of litigation matters were pending as of September 30, 2003. It is the
opinion of management, after consultation with counsel, that the ultimate
liability with respect to these claims, if any, will not materially affect the
financial position, results of operations or liquidity of the Company.
25
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Closed Block
In connection with the Company's plan of reorganization for its demutualization
and initial public offering, the Company created a closed block for the benefit
of policies included therein. Additional information regarding the creation of
the closed block and relevant accounting issues is contained in the notes to
consolidated financial statements of the Company's 2002 Form 10-K. The following
table sets forth certain summarized financial information relating to the closed
block as of the dates indicated.
September 30,
2003 December 31,
(unaudited) 2002
---------------------------
(in millions)
Liabilities
Future policy benefits ................................................... $ 10,635.5 $ 10,509.0
Policyholder dividend obligation ......................................... 446.6 288.9
Policyholders' funds ..................................................... 1,508.5 1,504.0
Policyholder dividends payable ........................................... 440.7 432.3
Other closed block liabilities ........................................... 100.2 111.7
------------------------
Total closed block liabilities ........................................ $ 13,131.5 $ 12,845.9
------------------------
Assets
Investments
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: September 30--$72.6; December 31--$97.1) ............... $ 68.9 $ 86.0
Available-for-sale--at fair value
(cost: September 30--$5,844.8; December 31--$5,580.2) ............... 6,294.5 5,823.2
Equity securities:
Available-for-sale--at fair value
(cost: September 30--$10.1; December 31--$10.5) ..................... 10.8 12.4
Mortgage loans on real estate ............................................ 1,618.2 1,665.8
Real estate .............................................................. 12.5 --
Policy loans ............................................................. 1,550.9 1,555.1
Short term investments ................................................... -- 25.2
Other invested assets .................................................... 269.8 212.4
------------------------
Total investments ..................................................... 9,825.6 9,380.1
Cash and cash equivalents ................................................ 163.7 244.0
Accrued investment income ................................................ 152.4 156.3
Other closed block assets ................................................ 323.8 327.6
------------------------
Total closed block assets ............................................. $ 10,465.5 $ 10,108.0
------------------------
Excess of reported closed block liabilities over assets
designated to the closed block ........................................ $ 2,666.0 $ 2,737.9
------------------------
Portion of above representing other comprehensive income:
Unrealized appreciation (depreciation), net of tax of $(157.4)
million and $(84.0) million at September 30 and December 31,
Respectively ........................................................ 292.4 155.9
Allocated to the policyholder dividend obligation, net of tax of
$159.1 million and $88.8 million at September 30 and December 31,
respectively ........................................................ (295.6) (164.9)
------------------------
Total ............................................................. (3.2) (9.0)
------------------------
Maximum future earnings to be recognized from closed block
assets and liabilities ................................................ $ 2,662.8 $ 2,728.9
========================
26
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Closed Block - (Continued)
September 30,
2003 December 31,
(unaudited) 2002
---------------------------
(in millions)
Change in the policyholder dividend obligation:
Balance at beginning of period ........................................ $ 288.9 $ 251.2
Impact on net income before income taxes ............................ (43.3) (70.8)
Unrealized investment gains (losses) ................................ 201.0 108.5
------------------------
Balance at end of period .............................................. $ 446.6 $ 288.9
========================
The following table sets forth certain summarized financial information relating
to the closed block for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------
(in millions)
Revenues
Premiums .............................................................. $ 221.4 $ 236.1 $ 664.6 $ 704.1
Net investment income ................................................. 161.2 166.2 487.5 499.4
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $(22.5)
million and $21.9 million for the three months ended September
30, 2003 and 2002, respectively and $(33.7) million and
$19.3 million for the nine months ended September 30, 2003 and
2002, respectively ................................................. (1.1) (1.2) (3.4) (3.9)
Other closed block revenues ........................................... (0.3) 0.1 (0.2) 0.1
-----------------------------------------------
Total closed block revenues ........................................ 381.2 401.2 1,148.5 1,199.7
Benefits and Expenses
Benefits to policyholders ............................................. 237.2 252.7 713.1 762.2
Change in the policyholder dividend obligation ........................ (2.6) (7.7) (11.3) (43.4)
Other closed block operating costs and expenses ....................... (0.5) (1.7) (4.9) (3.9)
Dividends to policyholders ............................................ 113.8 121.1 351.7 374.6
-----------------------------------------------
Total benefits and expenses ........................................ 347.9 364.4 1,048.6 1,089.5
-----------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
before income taxes ................................................ 33.3 36.8 99.9 110.2
Income taxes, net of amounts credited to the policyholder
dividend obligation of $0.5 million and $(0.3) million for the
three months ended September 30, 2003 and 2002, respectively and
$1.6 million and $3.4 million for the nine months ended
September 30, 2003 and 2002, respectively .......................... 12.0 12.5 35.3 37.5
-----------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
and income taxes ................................................. $ 21.3 $ 24.3 $ 64.6 $ 72.7
===============================================
27
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Severance
During the three and nine month periods ended September 30, 2003, the Company
continued its ongoing Competitive Position Project (the project). This project
was initiated in the first quarter of 1999 to reduce costs and increase future
operating efficiency by consolidating portions of the Company's operations and
is expected to continue through at least 2003. The project consists primarily of
reducing staff in the home office and terminating certain operations outside the
home office.
Since the inception of the project, as well as from similar initiatives such as
our information technology outsourcing, approximately 1,530 employees have been
terminated. Benefits paid since the inception of the project were $105.7 million
through September 30, 2003. As of September 30, 2003 and December 31, 2002, the
liability for employee termination costs, included in other liabilities was
$11.5 million and $12.4 million, respectively. Employee termination costs, net
of related curtailment pension and other post employment benefit related gains,
are included in other operating costs and expenses and were $0.6 million and
$6.6 million for the three months ended September 30, 2003 and 2002 and $10.0
million and $15.0 million for the nine months ended September 30, 2003 and 2002,
respectively. The total employee termination costs for the nine month period
ended September 30, 2003 included an estimated $5.0 million for planned
terminations related to our information technology outsourcing.
Note 8 -- Sale/Lease Back Transactions and Other Lease Obligations
On March 14, 2003, the Company sold three of its Home Office complex properties
to Beacon Capital Partners for $910.0 million. As part of the transaction, the
Company entered into a long-term lease of the space it now occupies in those
buildings and plans on continuing to use them as its corporate headquarters. As
a result of the sales-leaseback transaction, the Company recognized a current
realized gain of $271.4 million and a deferred profit of $209.4 million. A
capital lease obligation of $90.0 million was recorded for one of the
properties, which has a 15 year lease term. The other two properties have
operating leases which range from 5 to 12 years. The Company also provided
Beacon Capital Partners with a long-term sublease on the Company's parking
garage.
The future minimum lease payments by year and in the aggregate, under the
capital lease and under noncancelable operating leases related to those three
properties sold under a sales-leaseback transaction and the future sublease
rental income, consisted of the following for 2003:
Noncancelable Income from
Capital Operating Operating
Lease Leases Sub-lease
----------------------------------------
(in millions)
2003 .................................................. $ 6.9 $ 29.3 $ 1.3
2004 .................................................. 8.3 34.3 1.3
2005 .................................................. 8.0 33.5 1.3
2006................................................... 7.7 32.8 1.3
2007 .................................................. 7.4 32.2 1.3
Thereafter ............................................ 54.5 114.9 78.5
------- ------- ------
Total minimum payment ................................. 92.8 $277.0 $85.0
======= ======
Amounts representing interest expense................. (4.1)
-------
Present value of net minimum lease payments............ 88.7
Current portion of capital lease obligations........... (3.0)
-------
Total.............................................. $85.7
=======
28
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets
The carrying values of the Company's goodwill and other purchased intangible
assets are presented in the table below as of the dates presented. These assets
are included in other assets in the unaudited consolidated balance sheets.
Additional information about the Company's purchased intangible assets is
provided in the Notes to the Company's 2002 Form 10-K.
September 30, December 31,
2003 2002
------------------------------
(in millions)
Goodwill................................ $ 108.6 $ 108.6
Management contracts.................... 6.3 5.2
Value of business acquired.............. 170.8 177.2
Note 10 -- Significant Event
On September 28, 2003, the Company entered into a definitive merger agreement
with Manulife which is expected to close early in the second quarter of 2004. In
accordance with the agreement, each share of JHFS common stock will, at the time
of the merger, be converted into the right to receive 1.1853 shares of Manulife
stock. It is estimated that the shares of Manulife common stock to be issued to
JHFS shareholders in the merger will represent approximately 42% of the
outstanding Manulife common stock after the merger. The closing of the merger is
subject to conditions, including the adoption of the merger agreement by the
affirmative vote of JHFS shareholders holding a majority of the shares
outstanding and the approval by certain U.S. and Canadian regulatory authorities
including the U.S. Federal Trade Commission, the Commonwealth of Massachusetts
and other state regulatory agencies. Until the merger occurs, the Company will
continue to operate independently of Manulife. Thereafter the Company will
operate as a subsidiary of Manulife. The John Hancock name will be Manulife's
primary U.S. brand.
Note 11 -- Subsequent Event
On October 31, 2003, the Company announced the sale of the international equity
business of its institutional investment subsidiary, Independence Investment,
LLC effective November 3, 2003.
On November 4, 2003, the Company announced the close of the sale of its
group life insurance business with net proceeds of $6.7 million.
29
JOHN HANCOCK LIFE INSURANCE COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS
of OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of John Hancock Life
Insurance Company (John Hancock or the Company), a wholly owned subsidiary of
John Hancock Financial Services, Inc. (JHFS, or the Parent), as of September 30,
2003, compared with December 31, 2002, and its consolidated results of
operations for the three and nine month periods ended September 30, 2003 and
September 30, 2002, and, where appropriate, factors that may affect future
financial performance. This discussion should be read in conjunction with the
Company's MD&A and annual audited financial statements as of December 31, 2002
included in the Company's Form 10-K for the year ended December 31, 2002 filed
with the Securities and Exchange Commission (hereafter referred to as the
Company's 2002 Form 10-K) and unaudited consolidated financial statements and
related notes included elsewhere in this Form 10-Q. All of the Company's United
States Securities and Exchange Commission filings are available on the internet
at www.sec.gov, under the name Hancock John Life
Statements, analyses, and other information contained in this report
relating to trends in the Company's operations and financial results, the
markets for the Company's products, the future development of the Company's
business, and the contingencies and uncertainties to which the Company may be
subject, as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "intend," "will," "should," "may," and other
similar expressions, are "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. Such statements are made based upon
management's current expectations and beliefs concerning future events and their
potential effects on the Company. Future events and their effects on the Company
may not be these anticipated by management. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward-Looking Statements" included herein for a
discussion of factors that could cause or contribute to such material
differences.
Announced Merger with Manulife Financial Corporation
On September 28, 2003, the Company entered into a definitive merger
agreement with Manulife which is expected to close early in the second quarter
of 2004. In accordance with the agreement, each share of JHFS common stock will,
at the time of the merger, be converted into the right to receive 1.1853 shares
of Manulife stock. It is estimated that the shares of Manulife common stock to
be issued to JHFS shareholders in the merger will represent approximately 42% of
the outstanding Manulife common stock after the merger. The closing of the
merger is subject to conditions, including the adoption of the merger agreement
by the affirmative vote of JHFS shareholders holding a majority of the shares
outstanding and the approval by certain U.S. and Canadian regulatory authorities
including the U.S. Federal Trade Commission, the Commonwealth of Massachusetts
and other state regulatory agencies. Until the merger occurs, the Company will
continue to operate independently of Manulife. Thereafter the Company will
operate as a subsidiary of Manulife. The John Hancock name will be Manulife's
primary U.S. brand. This Form 10-Q does not reflect or assume any changes to
JHFS' business as a result of the proposed merger with Manulife. For additional
information, refer to our public filings with the SEC relating to the merger.
Critical Accounting Policies
General
We have identified the accounting policies below as critical to our
business operations and understanding of our results of operations. For a
detailed discussion of the application of these and other accounting policies,
see Note 1--Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements in the Company's 2002 Form 10-K. Note that the
application of these accounting policies in the preparation of this report
requires management to use judgments involving assumptions and estimates
concerning future results or other developments including the likelihood, timing
or amount of one or more future transactions or events. There can be no
assurance that actual results will not differ from those estimates. These
judgments are reviewed frequently by senior management, and an understanding of
them may enhance the reader's understanding of the Company's financial
statements. We have discussed the identification, selection and disclosure of
critical accounting estimates and policies with the Audit Committee of the Board
of Directors.
Consolidation Accounting
In January 2003, the Financial Accounting Standards Board issued
Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," (FIN 46) which clarifies the consolidation
accounting guidance of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," (ARB No. 51) to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity
30
JOHN HANCOCK LIFE INSURANCE COMPANY
to finance its activities without additional subordinated financial support from
other parties. Such entities are known as variable interest entities (VIEs). The
discussion below describes those entities which the Company has identified as
reasonably possible candidates for consolidation under FIN 46, which has
recently deferred by the FASB, requiring consolidation as of December 31, 2003.
The Company has not entered into primary beneficiary relationships with any VIEs
after January 31, 2003.
The Investment Management Segment of the Company manages invested assets
for customers under various fee-based arrangements. We use a variety of special
purpose entities (SPEs) to hold assets under management for customers under
these arrangements. These entities include investment vehicles commonly known as
collateralized debt obligations (CDOs). In certain cases various business units
of the Company make investments in the equity and/or debt of these entities to
support their insurance liabilities. Results of one of the CDOs are consolidated
with the Company's financial results, while the remaining CDOs are not
consolidated since the Company's equity interest is minor and the Company does
not guarantee payment of the CDOs' liabilities, except for guarantees made to
investors as part of separate account contracts which are already included in
separate account liabilities in the Company's consolidated balance sheets.
The Company generates income tax benefits by investing in apartment
properties (the Properties) that qualify for low income housing and/or historic
tax credits. The Company invests in the Properties directly, and also invests
indirectly via limited partnership real estate investment funds, which are
consolidated into the Company's financial statements. The Properties are
organized as limited partnerships or limited liability companies each having a
managing general partner or a managing member. The Company is usually the sole
limited partner or investor member in each Property; it is not the general
partner or managing member in any Property. The Properties typically raise
additional capital by issuing long term debt, which at times is guaranteed or
otherwise subsidized by federal or state agencies. In certain cases, the Company
invests in the mortgages of the Properties, which are non-recourse to the
general assets of the Company. In the event of default by a mortgagee of a
Property, the mortgage is subject to foreclosure.
The Company has a number of relationships with a disparate group of
entities, which result from the Company's direct investment in their equity
and/or debt. Two of these entities are energy investment partnerships, two are
investment funds organized as limited partnerships and three are operating
companies (a ski resort developer/operator, a stepvan manufacturer and a steel
spring manufacturing company). Subsequent to the Company's investment in them,
the operating companies underwent corporate reorganizations. The Company has
made no guarantees to any other parties involved with these entities, and has
only two outstanding capital commitment to the investment funds.
The Company is evaluating whether each of these entities is a VIE, and if
so, whether consolidation accounting should be used for each. The Company is
also in the process of estimating the future potential impact of conolidating
any potential VIE with which it is involved. However, in accordance with FIN 46,
it is possible that if the Company consolidates some of these entities, the
Company may, as a result, report lower consolidated net income and resulting
lower consolidated shareholders' equity in the short or medium term even though
the Company's shareholders do not have direct economic exposure to the
additional VIE losses recognized during consolidation. These losses would
ultimately reverse when the Company's status as primary beneficiary lapses.
Additional liabilities recognized as a result of consolidating any of
these entities would not represent additional claims on the general assets of
the Company; rather, they would represent claims against additional assets
recognized by the Company as a result of consolidating the VIEs. Conversely,
additional assets recognized as a result of consolidation would not represent
additional assets which the Company could use to satisfy claims against its
general assets, rather they would be used only to settle additional liabilities
recognized as a result of consolidation.
The Company's maximum loss in relation to these entities is limited to its
investments in them, future capital commitments made, and where the Company is
the issuer of separate account wrap guarantees to third party investors in these
entities, the amount of wrapped investments. Therefore, the Company believes
that these transactions have no impact on the Company's liquidity and capital
resources beyond what is already presented in the consolidated financial
statements and notes thereto. It is the Company's intent to display any
consolidated entities clearly on the face of the balance sheets with appropriate
disclosures. See Note 3 -- Relationships with Variable Interest Entities to the
unaudited consolidated financial statements.
The Company will adopt FIN 46 on December 31, 2003, has elected to apply
the provisions of FIN 46 prospectively, and is currently estimating the impact
on its consolidated financial position, results of operations and cash flows of
consolidating those VIEs for which the Company is the primary beneficiary. The
Company has not entered into primary beneficiary relationships with any VIEs
since January 31, 2003.
31
JOHN HANCOCK LIFE INSURANCE COMPANY
Amortization of Deferred Acquisition Costs
Costs that vary with, and are related primarily to, the production of new
business have been deferred to the extent that they are deemed recoverable and
appear as an asset on our consolidated balance sheets. Such costs include
commissions, certain costs of policy issue and underwriting, and certain agency
expenses. Similarly, any amounts assessed as initiation fees or front-end loads
are recorded as unearned revenue. The Company tests the recoverability of the
asset recorded for deferred policy acquisition costs, or DAC, annually with a
model that uses data such as market performance, lapse rates and expense levels.
At September 30, 2003 the Company's DAC asset was $3,380.0 million, of 3.5% of
total assets. We amortize DAC on term life and long-term care insurance ratably
with premiums. We amortize DAC on our annuity products and retail life
insurance, other than term, based on a percentage of the estimated gross profits
over the life of the policies, which are generally twenty years for annuities
and thirty years for life policies. Our estimated gross profits are computed
based on assumptions related to the underlying policies including mortality,
lapse, expenses, and asset growth rates. We amortize DAC and unearned revenue on
these policies at a constant percentage of gross profits over the life of the
policies.
Estimated gross profits, including net realized investment and other gains
(losses), are adjusted periodically to take into consideration the actual
experience to date and assumed changes in the remaining gross profits. When
estimated gross profits are adjusted, we also adjust the amortization of DAC to
maintain a constant amortization percentage over the life of the policies. Our
current estimated gross profits include certain judgments by our actuaries
concerning mortality, lapse and asset growth that are based on a combination of
actual Company experience and historical market experience of equity and fixed
income returns. Short-term variances of actual results from the judgments made
by management can impact quarter to quarter earnings. Our history has shown us
that the actual results over time for mortality, lapse and the combination of
investment returns and crediting rates (referred in the industry as interest
spread) for the life insurance and annuity products have reasonably followed the
long-term historical trends. In recent years, actual results for market
experience, or asset growth, have fluctuated considerably from historical trends
and the long-term assumptions made in calculating expected gross profits.
The effects on the amortization of DAC and unearned revenues of revisions
to estimated gross margins and profits are reflected in earnings in the period
such revisions are made. Expected gross profits or expected gross margins are
discounted at periodically revised interest rates and are applied to the
remaining benefit period. At both September 30, 2003 and December 31, 2002, the
average discount rate was 8.4% for participating traditional life insurance
products and 6.0% and 6.2%, respectively, for universal life products. The total
amortization period was 30 years for both participating traditional life
insurance products and universal life products.
The Company's future assumptions with respect to the expected gross
profits in its variable life insurance business in the Protection Segment and
variable annuity business in the Asset Gathering Segment are 8%, gross of fees
(which are approximately 1% to 2%), for the long-term growth rate assumption and
13% gross of fees on average for the next five years.
Sensitivity of Deferred Acquisition Costs Amortization. The level of DAC
amortization in the fourth quarter of 2003 will vary if separate account growth
rates vary from our current assumptions. The table below shows the estimated
increased (decreased) quarterly DAC amortization that will result if actual
separate account growth rates are different than the rates assumed in our DAC
models.
Asset
Protection Gathering Total
---------- --------- -----
(in millions)
18%..................................... $(0.2) $ (0.5) $ (0.7)
13%..................................... -- -- --
8%..................................... 0.2 1.8 2.0
Q3 2002 Unlocking: As of September 30, 2002, the Company changed several
future assumptions with respect to the expected gross profits in its variable
life business in the Protection Segment and variable annuity business in the
Asset Gathering Segment. First, we lowered the long-term growth rate assumption
from 9% to 8% gross of fees (which are approximately 1% to 2%). Second, we
lowered the average rates for the next five years from the mid-teens to 13%
gross of fees. Finally, we increased certain fee rates on these policies (the
variable series trust (VST) fee increase). These three changes are referred to
collectively as the Q3 2002 Unlocking. The result of these changes in
assumptions was a net write-off of deferred policy acquisition costs of $36.1
million in the variable annuity business in the Asset Gathering Segment and
$13.1 million (net of $12.3 million of unearned revenue and $2.5 million in
policy benefit reserves) in the variable life business in the Protection
Segment. The impact on net income of the Q3 2002 Unlocking was approximately
$27.5 million.
32
JOHN HANCOCK LIFE INSURANCE COMPANY
Benefits to Policyholders
The liability for "future policy benefits" is the largest liability
included in our consolidated balance sheets, 42.4% of total liabilities as of
September 30, 2003. Changes in this liability are generally reflected in the
"benefits to policyholders" caption in our consolidated statements of income.
This liability is primarily comprised of the present value of estimated future
payments to holders of life insurance and annuity products based on certain
management judgments. Reserves for future policy benefits of certain insurance
products are calculated using management's judgments of mortality, morbidity,
lapse, investment performance and expense levels that are based primarily on the
Company's past experience and are therefore reflective of the Company's proven
underwriting and investing abilities. Once these assumptions are made for a
given policy or group of policies, they will not be changed over the life of the
policy unless the Company recognizes a loss on the entire line of business. The
Company periodically reviews its policies for loss recognition and, based on
management's judgment, the Company from time to time may recognize a loss on
certain lines of business. Short-term variances of actual results from the
judgments made by management are reflected in current period earnings and can
impact quarter to quarter earnings.
Investment in Debt and Equity Securities
Impairments on our investment portfolio are recorded as a charge to income
in the period when the impairment is judged by management to occur. See the
General Account Investments section of this document and "Quantitative and
Qualitative Information About Market Risk--Credit Risk" section of this document
for a more detailed discussion of the investment officers' professional
judgments involved in determining impairments and fair values.
Certain of our fixed income securities classified as held-to-maturity and
available-for-sale are not publicly traded, and quoted market prices are not
available from brokers or investment bankers on these securities. The change in
the fair value of the available-for-sale securities is recorded in other
comprehensive income as an unrealized gain or loss. We calculate the fair value
of these securities ourselves through the use of pricing models and discounted
cash flows calling for a substantial level of professional investment management
judgments. Our approach is based on currently available information, including
information obtained by reviewing similarly traded securities in the market, and
we believe it to be appropriate and fundamentally sound. However, different
pricing models or assumptions or changes in relevant current information could
produce different valuation results. The Company's pricing model takes into
account a number of factors based on current market conditions and trading
levels of similar securities. These include current market based factors related
to credit quality, country of issue, market sector and average investment life.
The resulting prices are then reviewed by the pricing analysts and members of
the Controller's Department. Our pricing analysts take appropriate action to
reduce valuation of securities where an event occurs which negatively impacts
the securities' value. Certain events that could impact the valuation of
securities include issuer credit ratings, business climate, management changes,
litigation and government actions, among others.
As part of the valuation process we attempt to identify securities which
may have experienced an other than temporary decline in value, and thus require
the recognition of an impairment. To assist in identifying impairments, at the
end of each quarter our Investment Review Committee reviews all securities where
market value is less than ninety percent of amortized cost for three months or
more to determine whether impairments need to be taken. This committee includes
the head of workouts, the head of each industry team, the head of portfolio
management, the Chief Investment Officer, and the Corporate Risk Officer who
reports to the Chief Financial Officer. The analysis focuses on each company's
or project's ability to service its debts in a timely fashion and the length of
time the security has been trading below cost. The results of this analysis are
reviewed by the Life Company's Committee of Finance, a subcommittee of the Life
Company's Board of Directors, quarterly. To supplement this process, a quarterly
review is made of the entire fixed maturity portfolio to assess credit quality,
including a review of all impairments with the Life Company's Committee of
Finance. See "Management's Discussion and Analysis of Financial Condition and
Analysis of Financial Condition and Results of Operations--General Account
Investments" section of this document for a more detailed discussion of this
process and the judgments used therein.
Benefit Plans
The Company annually reviews its pension and other post-employment benefit
plan assumptions for the discount rate, the long-term rate of return on plan
assets, and the compensation increase rate. All assumptions are reviewed with
the Audit Committee.
The assumed discount rate is set in the range of (a) the rate from the
December daily weighted average of long-term corporate bond yields (as published
by Moody's Investor Services for rating categories A, Aa, Aaa, and Baa) less a
5% allowance for expenses and default and (b) the rate from the rounded average
of the prior year's discount rate and the rate in (a) above. The discount rate
in effect for 2003 is 6.75%. A 0.25% increase in the discount rate would
33
JOHN HANCOCK LIFE INSURANCE COMPANY
decrease pension benefits Projected Benefit Obligation (PBO) and 2003 Net
Periodic Pension Cost (NPPC) by approximately $65.1 million and $4.9 million
respectively. A 0.25% increase in the discount rate would decrease other post-
employment benefits Accumulated Postretirement Benefit Obligation (APBO) and
2003 Net Periodic Benefit Cost (NPBC) by approximately $18.1 million and $1.2
million, respectively.
The assumed long-term rate of return on plan assets is generally set at
the long-term rate expected to be earned (based on the Capital Asset Pricing
Model and similar tools) based on the long-term investment policy of the plans
and the various classes of the invested funds. For 2003, net periodic pension
(and benefit) cost, an 8.75% long term rate of return assumption is being used.
A 0.25% increase in the long-term rate of return would decrease 2003 NPPC by
approximately $4.6 million and 2003 NPBC by approximately $0.5 million. The
expected return on plan assets is based on the fair market value of the plan
assets as of December 31, 2002. The target asset mix of the plan is: 50%
domestic stock, 15% international stock, 10% private equity, and 25% fixed
income.
The compensation rate increase assumption is generally set at a rate
consistent with current and expected long-term compensation and salary policy;
including inflation. A change in the compensation rate increase assumption can
be expected to move in the same direction as a change in the discount rate. A
0.25% decrease in the salary scale would decrease pension benefits PBO and NPPC
by approximately $8.3 million and $1.2 million respectively. Post employment
benefits are independent of compensation.
The Company uses a 5% corridor for the amortization of actuarial
gains/losses. Actuarial gains/losses are amortized over approximately 13 years
for pension costs and over approximately 13 years for other benefit costs.
Prior service costs are amortized over approximately 9 years for pension
costs and over approximately 17 years for post employment benefit costs.
Income Taxes
Our reported effective tax rate on net income was 20.1% and 27.8% for the
three and nine months ended September 30, 2003 compared to 20.8% and 22.7% for
the three and nine month periods ended September 30, 2002. Our effective tax
rate is based on expected income, statutory tax rates and tax planning
opportunities available to us. Significant judgment is required in determining
our effective tax rate and in evaluating our tax positions. We establish
reserves when, despite our belief that our tax return positions are fully
supportable, we believe that certain positions are likely to be challenged and
that we may not succeed. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of reserve provisions and changes to reserves that we
consider appropriate, as well as related interest. This rate is then applied to
our year-to-date operating results.
Tax regulations require certain items to be included in the tax return at
different times than those items are reflected in the financial statements. As a
result, our effective tax rate reflected in our financial statements is
different than that reported in our tax return. Some of these differences are
permanent, such as affordable housing tax credits, and some are temporary
differences, such as depreciation expense. Temporary differences create deferred
tax assets and liabilities. Deferred tax assets generally represent items that
can be used as a tax deduction or credit in our tax return in future years for
which we have already recorded the tax benefit in our income statement. Our
policy is to establish valuation allowances for deferred tax assets when the
amount of expected future taxable income is not likely to support the use of the
deduction or credit. Deferred tax liabilities generally represent tax expense
recognized in our financial statements for which payment has been deferred or
expense for which we have already taken a deduction on our tax return, but have
not yet recognized as expense in our financial statements.
A number of years may elapse before a particular matter, for which we have
established a reserve, is audited and finally resolved. The Internal Revenue
Service is currently examining our tax returns for 1996 through 1998.
While it is often difficult to predict the final outcome or the timing of
resolution of any particular tax matter, we believe that our reserves reflect
the probable outcome of known tax contingencies. Our tax reserves are presented
in the balance sheet within other liabilities.
Reinsurance
We reinsure portions of the risks we assume for our protection insurance
products. The maximum amount of individual ordinary life insurance retained by
us on any life is $10 million under an individual policy and $20 million under a
second-to-die policy. As of January 1, 2001, we established additional
reinsurance programs, which limit our exposure to fluctuations in life insurance
claims for individuals for whom the net amount at risk is $3 million or more. As
of January 1, 2001, the Company entered into an agreement with two reinsurers
covering 50% of its closed block business. The treaties are structured so they
will not affect policyholder dividends or any other financial items reported
within the closed block, which was established at the time of the Life Company's
demutualization to protect the reasonable dividend expectations of certain
participating life insurance policyholders.
34
JOHN HANCOCK LIFE INSURANCE COMPANY
In addition, the Company has entered into reinsurance agreements to
specifically address insurance exposure to multiple life insurance claims as a
result of a catastrophic event. The Company has put into place, effective July
1, 2002, catastrophic reinsurance covering both individual and group life
insurance policies written by all of its U.S. life insurance subsidiaries.
Effective July 1, 2003, the deductible for individual and group coverages
combined was reduced from $25 million to $17.5 million per occurrence and the
limit of coverage is $40 million per occurrence. Both the deductible and the
limit apply to the combined U.S. insurance subsidiaries. The Company has
supplemented this coverage by reinsuring all of its accidental death exposures
in excess of $100,000 per life under its group life insurance coverages, and 50%
of such exposures below $100,000. Should catastrophic reinsurance become
unavailable to the Company in the future, the absence of, or further limitations
on, reinsurance coverage, could adversely affect the Company's future net income
and financial position.
By entering into reinsurance agreements with a diverse group of highly
rated reinsurers, we seek to control our exposure to losses. Our reinsurance,
however, does not discharge our legal obligations to pay policy claims on the
policies reinsured. As a result, we enter into reinsurance agreements only with
highly rated reinsurers. Nevertheless, there can be no assurance that all our
reinsurers will pay the claims we make against them. Failure of a reinsurer to
pay a claim could adversely affect our business, financial condition or results
of operations.
Our long-term care insurance business units reinsure with John Hancock
Reassurance Company, LTD (JHReCo), a wholly owned subsidiary of JHFS. In 2001,
Group Long Term Care ceded 50% of their inforce business prior to 1997 to JHReCO
(up from 40% in 2000 and 30% in 1999) and 50% of all new business effective in
1997 and later. Retail Long-Term Care cedes to JHReCo; 50% of all new business
effective 1997 and later and 50% of business assumed from the acquisition of the
Fortis long-term care insurance business in March of 2000. Fortis was
retro-ceded to JHReCo.
Our non-traditional life insurance business reinsures with JHReCo 100% of
the risk associated with the no lapse guarantee benefit present in the
protection universal life insurance products. This reinsurance agreement was
effective in 2001 and includes policies issued in years 2001 and later. In
addition, the traditional life insurance business entered into a reinsurance
agreement with JHReCo to reinsure 50% of its retained level premium term
business written by the Company's subsidiary, John Hancock Variable Life
Insurance Company. The agreement was effective in 2002 and includes inforce
policies.
Economic Trends
Economic trends impact profitability and sales of the Company's products.
The impacts of economic trends on the Company's profitability are similar to
their impact on the financial markets. The Company estimates that a 1% increase
(decrease) in interest rates occurring evenly over a twelve month period, or an
estimated 8 basis points per month, would increase (decrease) segment after tax
operating income by approximately $4 million, and a 5% increase (decrease) in
equity markets occurring evenly over a twelve month period, or an estimated 42
basis points per month, would increase (decrease) segment after tax operating
income by approximately $10 million.
The sales and other financial results of our retail business over the last
several years have been affected by general economic and industry trends.
Variable products, including variable life insurance and variable annuities,
until 2001 had accounted for the majority of recent increases in total premiums
and deposits for the insurance industry as a result of the strong equity market
growth in those years and the "baby boom" generation reaching its high-earnings
years and seeking tax-advantaged investments to prepare for retirement. This
trend has changed due to fluctuations in stock market performance and we have
seen investors return to fixed income products. Our diverse distribution network
and product offerings will assist in the maintenance of assets and provide for
sales growth. Although sales of traditional whole life insurance products have
experienced continued declines, sales of fixed annuity products and corporate
owned life insurance have increased. Universal life sales have also increased
for the Company and for the industry as a whole, due in part to the market's
demand for products of a fixed nature. Term life sales have increased over the
past few years, as consumer continue to seek lower cost options to solving their
protection needs. With respect to our long-term care insurance products,
premiums have increased due to the aging of the population and the expected
inability of government entitlement programs to meet their medical needs in
retirement.
35
JOHN HANCOCK LIFE INSURANCE COMPANY
Premiums and deposits of our individual annuity products decreased from a
strong prior year by 46.5% to $473.8 million and 14.2% to $2,290.9 million for
the three and nine month periods ended September 30, 2003. Premiums and deposits
on our long-term care insurance increased 21.0%, to $138.4 million and 17.7%, to
$393.5 million for the three and nine month periods ended September 30, 2003 due
to strong growth in the business and increasing renewal premiums, while our
variable life insurance product deposits in 2003 decreased 6.6%, to $219.3
million and 14.3%, to $658.5 million, for the same time periods. The average
policyholder account value in the universal life insurance product line
increased $1,252.5 million, or 42.1%, and $1,176.9 million, or 40.8%, for the
three and nine month periods ended September 30, 2003 from the comparable
periods, due to underlying growth and the December 31, 2002 acquisition of
Allmerica's fixed universal life insurance business. Mutual fund deposits
decreased $303.1 million, or 18.4%, to $1,345.5 million for the three month
periods ended September 30, 2003, due to a decline in institutional advisory
account sales. Mutual fund deposits increased $404.5 million for the nine month
period ended September 30, 2003 due to an increase in closed-end fund sales from
$622.2 million to $1.4 billion, partially offset by a decrease in institutional
advisory account sales. Redemptions decreased $20.9 million, or 1.6%, to
$1,311.6 million and increased $297.6 million, or 8.0% to $4,003.5 million for
the three and nine month periods ended September 30, 2003. We continue to manage
operating expenses aggressively to protect profit margins as we work to stablize
and grow assets under management in the mutual fund business. However, our
mutual fund operations are impacted by general market trends, and a downturn in
the mutual fund market may negatively affect our future operating results.
Recent economic and industry trends also have affected the sales and
financial results of our institutional business. Sales of fund-type products
increased 36.7% or $242.8 million and decreased 29.2% or $887.1 million for the
three and nine months ended September 30, 2003. The increase in the quarter was
driven by the improved market with more John Hancock products available and our
increased success in marketing the products. Premiums on group annuity products
were down due to market competition. We continue to look for opportunistic sales
in the single premium group annuity market where our pricing standards are met.
Partially offsetting the decrease in sales was the introduction of
SignatureNotes, a new product launched in late 2002 which generated sales of
$821.7 million in 2003. SignatureNotes is designed to generate sales from the
conservative retail investor looking for protection of principal and stable
returns. The investment management services we provide to domestic and
international institutions include services and products such as investment
advisory client portfolios, individually managed and pooled separate accounts,
registered investment company funds, bond and mortgage securitizations,
collateralized bond obligation funds and mutual fund management capabilities.
Assets under management of our Investment Management Segment increased to
$28,655.8 million as of September 30, 2003 from $27,491.4 million as of December
31, 2002. The $1.2 billion increase in assets under management was driven by
$1.6 billion in market appreciation offset by $0.6 billion in net outflows at
Independence.
Transactions Affecting Comparability of Results of Operations
The acquisition described under the table below was recorded under the
purchase method of accounting and, accordingly, the operating results have been
included in the Company's consolidated results of operations from the date of
acquisition. The purchase price was allocated to the assets acquired and the
liabilities assumed based on estimated fair values, with the excess of the
applicable purchase price over the estimated fair values, if any, recorded as
goodwill. This acquisition was made by the Company in execution of its plan to
acquire businesses that have strategic value, meet its earnings requirements and
advance the growth of its current businesses.
The disposal described under the table below was conducted in order to
execute the Company's strategy to focus resources on business in which it can
have a leadership position. The table below presents actual and proforma data,
for comparative purposes, of revenue, net income and earnings per share for the
periods indicated, to demonstrate the proforma effect of the acquisition and of
the disposal as if it occurred on January 1, 2002.
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
Proforma 2003 Proforma 2002 Proforma 2003 Proforma 2002
------------------------------------------------ --------------------------------------------------
(in millions)
Revenue................ $1,690.4 $1,690.4 $1,632.5 $1,663.0 $5,338.5 $5,383.3 $4,780.4 $4,876.4
Net income............. $ 157.7 $ 157.7 $ 132.6 $ 133.3 $ 683.6 $ 686.4 $ 366.1 $ 366.7
36
JOHN HANCOCK LIFE INSURANCE COMPANY
Acquisition:
On December 31, 2002, the Company acquired the fixed universal life
insurance business of Allmerica Financial Corporation (Allmerica) through a
reinsurance agreement for approximately $104.3 million. There was no impact on
the Company's results of operations from the acquired insurance business during
2002.
Disposal:
On June 19, 2003, the Company agreed to sell its group life insurance
business through a reinsurance agreement with Metropolitan Life Insurance
Company, Inc (MetLife). The Company is ceding all activity after May 1, 2003 to
MetLife. The transaction was recorded as of May 1, 2003 and closed November 4,
2003.
Subsequent Events
On October 31, 2003, the Company announced the sale of the international
equity business of its institutional investment subsidiary, Independence
Investment, LLC effective November 3, 2003.
On November 4, 2003, the Company announced the close of the sale of its
group life insurance business with net proceeds of $6.7 million.
Results of Operations
The table below presents the consolidated results of operations for the
periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------------------------------
(in millions)
Revenues
Premiums .......................................................... $ 475.1 $ 482.9 $1,431.8 $1,432.2
Universal life and investment-type product fees ................... 155.6 160.7 463.7 459.0
Net investment income ............................................. 931.5 878.4 2,806.9 2,654.9
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs, amounts
credited to participating pensions contractholders and the
policyholder dividend obligation (1) .......................... (62.7) (37.8) 121.0 (249.3)
Investment management revenues, commissions, and other fees ....... 129.3 124.6 370.9 405.9
Other revenue ..................................................... 61.6 54.2 189.0 173.7
-------- -------- -------- --------
Total revenues ............................................ 1,690.4 1,663.0 5,383.3 4,876.4
Benefits and expenses
Benefits to policyholders, excluding amounts related to net
realized investment and other gains (losses) credited
to participating pension contractholders and the
policyholder dividend obligation (2) .......................... 935.1 937.6 2,804.1 2,806.1
Other operating costs and expenses ................................ 348.9 286.2 1,018.4 920.6
Amortization of deferred policy acquisition costs, excluding
amounts related to net realized investment and other gains
(losses) (3) .................................................. 57.5 135.1 188.8 257.6
Dividends to policyholders ........................................ 151.6 135.7 421.6 417.5
-------- -------- -------- --------
Total benefits and expenses ............................... 1,493.1 1,494.6 4,432.9 4,401.8
Income before taxes ............................................... 197.3 168.4 950.4 474.6
-------- -------- -------- --------
Income taxes ...................................................... 39.6 35.1 264.0 107.9
-------- -------- -------- --------
Net income ................................................ $ 157.7 $ 133.3 $ 686.4 $ 366.7
======== ======== ======== ========
(1) Net of related amortization of deferred policy acquisition costs, amounts
credited to participating pension contractholders and the policyholder
dividend obligation of $(35.4) million and $25.8 million for the three
months ended September 30, 2003 and 2002, and $(35.9) million and
$(9.1) million for the nine months ended September 30, 2003 and 2002,
respectively.
(2) Excluding amounts related to net realized investment and other gains
(losses) credited to participating pension contractholders and the
policyholder dividend obligation of $(29.7) million and $10.9 million for
the three months ended September 30, 2003 and 2002, and $(42.6) million
and $0.4 million for the nine months ended September 30, 2003 and 2002,
respectively.
(3) Excluding amounts related to net realized investment and other gains
(losses) of $(5.7) million and $14.9 million for the three months ended
September 30, 2003 and 2002, and $6.7 million and $(9.5) million for the
nine months ended September 30, 2003 and 2002, respectively.
37
JOHN HANCOCK LIFE INSURANCE COMPANY
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
During the first quarter of 2003, the Company implemented an
organizational change within the Corporate and Other Segment which resulted in
the reclassification of the 2002 results for the Federal long-term care
insurance business to the Protection Segment. The following discussion presents
the results of our segments on a basis consistent across periods with the new
organization structure. The reclassification associated with the Federal
long-term care insurance business has no impact on segment after-tax operating
income, or net income of the business. The reclassification increased Protection
Segment after-tax operating income and decreased Corporate and Other Segment
after-tax operating income by $0.2 million for the three month period ended
September 30, 2002.
Consolidated income before income taxes increased 17.2%, or $28.9 million,
from the prior year. The increase was driven by growth in income before income
taxes of $46.4 in the Protection Segment, $23.1 million in the Guaranteed and
Structured Financial Products (G&SFP) Segment, and $0.3 million in the
Investment Management Segment. Partially offsetting these increases was a
decrease of $7.0 million in the Asset Gathering Segment and $33.9 million in the
Corporate and Other Segment. The increase in the consolidated income before
income taxes was driven by a $53.1 million improvement in net investment income
and a $4.7 million increase in advisory fees offset by a $24.9 increase in net
realized investment and other losses compared to the prior year. The improvement
in net investment income was driven by the $25.5 million increase in the
Protection Segment and $31.3 million in the Asset Gathering Segment. The
increase in advisory fees was driven by a growth of $3.6 million in the
Investment Management Segment. The increase in net investment and other losses
compared to prior year was driven primarily by the $30.3 million lower losses in
the G&SFP Segment offset by a $63.9 million increase in losses in the Asset
Gathering Segment.
Revenues increased 1.6%, or $27.4 million, from the prior year. The
increase in revenues was driven by the aforementioned increase in net investment
income and and advisory fees offset by the increased net realized investment and
other losses compared to the prior year. Consolidated net realized investment
and other losses increased 65.9%, or $24.9 million, from the prior year. See
detail of current period net realized investment and other gains (losses) in
table below. The change in net realized investment and other gains(losses) is
the result of impairments on fixed maturity securities and equities of $72.9
million and hedging adjustments of $(95.1) million. The net realized investment
and other gains on the sale of fixed maturity securities of $59.7 million,
mortgage loans on real estate of $33.3 million, and equity securities of $18.0
million offset the previously discussed impairments and hedging adjustments. The
largest impairments were $26.4 million relating to securities secured by
aircraft leased by a bankrupt company, $14.9 million relating to the development
of three natural gas fired power projects, and $13.2 million relating to an
Australian mining company. For additional analysis regarding net realized
investment and other gains (losses), see General Account Investments in this
MD&A.
Gross Gain Gross Loss Hedging Net Realized Investment
For the Three Months Ended September 30, 2003 Impairment on Disposal on Disposal Adjustments and Other Gain (Loss)
(in millions) ----------------------------------------------------------------------------
Fixed maturity securities (1) (2) ...... $(70.7) $ 59.7 $(22.7) $(48.9) $ (82.6)
Equity securities (3)................... (2.2) 18.0 (0.6) -- 15.2
Mortgage loans on real estate........... -- 33.3 (16.2) (13.8) 3.3
Real estate............................. -- 0.1 (2.2) -- (2.1)
Other invested assets................... -- 1.9 (1.4) -- 0.5
Derivatives............................. -- -- -- (32.4) (32.4)
------------------------------------------------------------------------------
Subtotal................. $(72.9) $113.0 $(43.1) $(95.1) $ (98.1)
==============================================================================
Amortization adjustment for deferred policy acquisition costs................. 5.7
Amounts credited to participating pension contractholders..................... 7.1
Amounts credited to the policyholder dividend obligation..................... 22.6
--------------------------
Total.................................................................... $ (62.7)
==========================
(1) Fixed maturity securities gain on disposals includes $14.5 million of
gains from previously impaired securities.
(2) Fixed maturity securities loss on disposals includes $0.3 million of
credit related losses.
(3) Equity securities gain on disposal includes $1.5 million of gains from
equity securities received as settlement compensation from an investee
whose securities had previously been impaired.
The hedging adjustments in the fixed maturities and mortgage loans asset
classes are non-cash adjustments representing the amortization or reversal of
prior fair value adjustments on assets in those classes that were or are
designated as hedged
38
JOHN HANCOCK LIFE INSURANCE COMPANY
items in a fair value hedge. When an asset or liability is so designated, its
cost basis is adjusted in response to movements in interest rates. These
adjustments are non-cash and reverse with the passage of time as the asset or
liability and derivative mature. The hedging adjustments on the derivatives
represent non-cash adjustments on derivative instruments and on assets and
liabilities designated as hedged items reflecting the change in fair value of
those items.
Premiums decreased 1.6%, or $7.8 million, from the prior year. The
decrease in premiums was driven by the Corporate and Other Segment which
declined 11.9%, or $12.3 million, driven by the sale of the group life business.
Premiums also decreased in the G&SFP Segment 21.3%, or $1.0 million. In
addition, premiums in the Asset Gathering Segment decreased $6.5 million, driven
by the immediate annuity business. These declines in premiums were partially
offset by an increase in the Protection Segment of $12.0 million primarily due
to long-term care insurance premiums driven by business growth from higher
sales.
Universal life and investment-type product fees decreased 3.2%, or $5.1
million. The decrease in product fees was driven by the G&SFP Segment, where
fees decreased $3.0 million, or 22.2%, due to lower asset-based fees. In
addition, the Protection Segment, where product fees declined $1.4 million due
primarily to a $10.4 million decrease in amortization of unearned revenue, the
prior period included higher amortization of $12.3 million associated with the
Q3 2002 Unlocking. The decrease in the Protection Segment was partially offset
by the increase in the cost of insurance fees of $8.8 million resulting from the
addition of the Allmerica block of business assumed as of December 31, 2002 and
from growth in the existing business. The Asset Gathering Segment's product fees
also declined 2.4%, or $0.7 million, primarily in the variable annuity business
on lower surrender fees driven by improved lapse rates.
Net investment income increased 6.0%, or $53.1 million, from the prior
year. The growth in net investment income was driven by the Asset Gathering
Segment which increased 21.2%, or $31.3 million, on growth on the fixed annuity
business. Average invested assets in the fixed annuity business increased 30.3%,
or $10,777.4 million, while the average investment yield decreased 53 basis
points from the prior year. See additional analysis in the Asset Gathering
Segment MD&A. In addition, net investment income increased in the Protection
Segment by 7.7%, or $25.5 million, driven by the 15.9% increase in average asset
balances, partially offset by a 53 basis point decrease in yields. Net
investment income increased $24.8 million in the Corporation and Other Segment.
These increases in net investment income were partially offset by a decline in
the G&SFP Segment and the Investment Management Segment. Driven by declining
interest rates, G&SFP Segment net investment income declined by 6.6%, or $28.0
million, despite growth in the average invested assets backing spread-based
products. The average yield on invested assets decreased to 5.46%, reflecting
lower interest rate environment in the current period. Net investment income
varies with market rates because the return on approximately $11.0 billion of
the asset portfolio floats with market rates. Matching the interest rate
exposure on our asset liabilities is a central feature of our asset/liability
management process. The Investment Management Segment net investment income
declined 18.2%, or $0.6 million, primarily resulting from lower income earned on
a lower average amount of mortgages held for sale. For additional analysis of
net investment income and yields see the General Account Investments section of
this MD&A.
Advisory fees increased 3.8%, or $4.7 million, from the prior year.
Advisory fees increased $3.6 million in the Investment Management Segment due
primarily to the Company's institutional advisor, the Independence group of
companies (Independence) where fees increased 1.5%, or $0.2 million. Advisory
fees remained stable in the Asset Gathering Segment driven by the impact of
market appreciation on assets under management in the mutual fund business.
Other revenue increased 13.7%, or $7.4 million, from the prior year. The
Company's other revenue is largely made up of Signature Fruit in the Corporate
and Other Segment. The increase in other revenue is driven by the $2.8 million
increase in the Corporate and Other Segment, where Signature Fruit generated
revenue of $55.6 million in the current period. Other revenue also increased in
the Protection Segment by $2.2 million due to the Federal long-term care
insurance business which officially began operation on October 1, 2002. The
Federal long-term care insurance business is a fee business where the Company
administers and supports employee long-term care insurance benefits offered by
the Federal Government to its employees. In addition, other revenue increased in
the Asset Gathering Segment by $2.0 million.
Benefits to policyholders decreased 0.3%, or $2.5 million, from the prior
year. The decrease in benefits to policyholders was driven by the G&SFP Segment
which declined 10.3%, or $30.7 million. Lower benefits to policyholders in the
G&SFP Segment were driven by the spread-based business where interest credited
decreased $25.0 million due to a decline in the average crediting rate on
account balances resulting from the reset on floating rate liabilities. In
addition, the Corporate and
39
JOHN HANCOCK LIFE INSURANCE COMPANY
Other Segment declined 22.3%, or $18.4 million, driven by the sale of the group
life insurance business. Partially offsetting these decreases in benefits to
policyholders was an increase in the Protection Segment. The Protection Segment
increased $40.0 million driven by the growth in the non-traditional life
insurance business on the acquisition of the Allmerica business and growth in
the underlying business. In addition, Protection Segment benefits to
policyholders increased in the long-term care insurance business on growth of
the business. The Asset Gathering Segment benefits to policyholders increased
5.8%, or $6.7 million, due to growth in the fixed annuity business. The growth
in the fixed annuity business was driven by a $15.4 million increase in interest
credited as a result of higher average account balances offset by a $5.6 million
decrease in reserve provisions for life-contingent immediate fixed annuity fund
values.
Operating costs and expenses increased 21.9%, or $62.7 million. Included
in the Company's operating costs and expenses are all the operating expenses of
Signature Fruit in the Corporate and Other Segment. Signature Fruit operating
costs and expenses were $57.9 million, an increase of $0.7 million from the
prior year. The increase in operating costs and expenses was driven by the
Corporate and Other Segment, which increased 52.6%, or $38.9 million, due to
increases in the corporate account and Signature Fruit. The corporate account
increases in expenses were driven by $7.9 million increase in the net periodic
pension costs, $2.3 million increase in compensation expense, and $2.1 million
increase in other post employment benefits. In addition, operating costs and
expenses increased 22.0%, or $8.1 million in the G&SFP Segment due to an
increased level of reinsurance arrangements combined with compensation costs.
Operating costs and expenses increased 5.0%, or $1.1 million, in the Investment
Management Segment due to higher compensation costs. Also included in other
operating costs and expenses is $0.6 million of increased severance costs
associated with the closing down of the high net worth management group offset
by saving from ongoing cost reduction efforts. See Note 7 - Severance to the
unaudited consolidated financial statements. There was also an increase in
operating costs in the Protection Segment of $11.1 million, or 16.0%, primarily
due to increases in IT spending, compensation expenses, and higher amortization
of the value of the business acquired due to the addition of Allmerica block as
of December 31, 2002. The Asset Gathering Segment increased by 4.3%, or $3.6
million, driven by compensation expense.
Amortization of deferred policy acquisition costs decreased 57.4%, or
$77.6 million, from the prior year. The decrease in amortization of deferred
policy acquisition costs was driven by the Asset Gathering Segment which
decreased 62.0%, or $41.5 million from the prior year. This was primarily due to
the Q3 2002 Unlocking which resulted in $36.1 million additional amortization of
deferred policy acquisition costs in the prior year. Also contributing to the
decrease in the quarter was in the variable annuity business due to the Q3 2002
Unlocking which resulted in $27.9 million additional amortization of deferred
policy acquisition costs in the prior year. In addition, strong separate account
performance resulted in lower current period amortization of deferred policy
acquisition costs.
Dividends to policyholders increased 11.7%, or $15.9 million, from the
prior year. The increase in dividends to policyholders was driven by the
Corporate and Other Segment, which increased $25.0 million compared to prior
year due to the accounting for the sale of the group life insurance business.
This increase was offset by the Protection Segment, which declined 5.7%, or $7.2
million, due to a dividend scale cut for the traditional life insurance
business.
Income taxes were $39.6 million in 2003, compared to $35.1 million for
2002. Our effective tax rate was 20.1% in 2003, compared to 20.8% in 2002. The
lower effective tax rate was primarily due to an increase in affordable housing
tax credits, decrease in deficiency charge, and a net change in other permanent
differences.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
During the first quarter of 2003, the Company implemented an
organizational change within the Corporate and Other Segment which resulted in
the reclassification of the 2002 results for the Federal long-term care
insurance business to the Protection Segment. The following discussion presents
the results of our segments on a basis consistent across periods with the new
organization structure. The reclassification associated with the Federal
long-term care insurance business has no impact on segment after-tax operating
income, or net income of the business. The reclassification increased Protection
Segment after-tax operating income and decreased Corporate and Other Segment
after-tax operating income by $0.5 million for the nine month period ended
September 30, 2002.
Consolidated income before income taxes increased 100.3%, or $475.8
million, from the prior year. The increase was driven by growth in income before
income taxes of $252.9 million in the Corporate and Other Segment, $161.0
million in the Protection Segment, $38.0 million in the Asset Gathering Segment,
$15.4 million in the G&SFP Segment, and $8.6 million in the Investment
Management Segment. The increase in the Corporate and Other Segment was driven
by growth in net realized investment and other gains of $318.0 million due to a
gain of $271.4 million (and a deferred profit of $209.4 million) on the sale of
the Company's home office properties during the first quarter of 2003. See Note
8 -- Sales / Lease-back Transactions in the notes to the unaudited consolidated
financial statements.
40
JOHN HANCOCK LIFE INSURANCE COMPANY
Revenues increased 10.4%, or $506.9 million, from the prior year. The
increase in revenues was driven by the Corporate and Other Segment where net
realized investment and other gains increased $318.0 million due to a gain of
$271.4 million (and a deferred profit of $209.4 million) on the sale of the
Company's home office properties. Consolidated net realized investment and other
gains increased $370.3 million from the prior year. See detail of current period
net realized investment and other gains (losses) in table below. The change in
net realized investment and other gains is the result of gain on disposal of
fixed maturity securities and the sale of the Company's home office properties.
The net realized investment and other gains were partially offset by other than
temporary declines in value of fixed maturity securities of $383.3 million,
equity securities of $27.5 million, and other invested assets of $10.3 million
and hedging adjustments of $(154.2) million. The largest impairments were $37.6
million relating to a large, national farmer-owned dairy co-operative, $36.1
million relating to securities secured by aircraft leased by a bankrupt company,
$29.8 million related to an Australian mining company, $27.3 million relating to
a large, North American transportation provider, $26.3 million relating to a
special purpose company created to sublease aircraft to two major U.S. airlines,
$25.0 million relating to a toll road. For additional analysis regarding net
realized investment and other gains (losses), see General Account Investments in
the MD&A.
Gross Gain Gross Loss Hedging Net Realized Investment
For the Nine Months Ended September 30, 2003 Impairment on Disposal on Disposal Adjustments and Other Gain (Loss)
(in millions) -------------------------------------------------------------------------------
Fixed maturity securities (1) (2)....... $(383.3) $370.9 $ (65.5) $(203.2) $(281.1)
Equity securities (3)................... (27.5) 49.9 (2.5) -- 19.9
Mortgage loans on real estate........... -- 54.1 (28.1) (46.7) (20.7)
Real estate............................. 278.3 (5.0) -- 273.3
Other invested assets................... (10.3) 15.7 (7.4) -- (2.0)
Derivatives............................. -- -- -- 95.7 95.7
-------------------------------------------------------------------------------
Subtotal................. $(421.1) $768.9 $(108.5) $(154.2) $ 85.1
===============================================================================
Amortization adjustment for deferred policy acquisition costs................. (6.7)
Amounts charged to participating pension contractholders...................... 8.6
Amounts charged to the policyholder dividend obligation...................... 34.0
--------------------------
Total.................................................................... $ 121.0
==========================
(1) Fixed maturity securities gain on disposals includes $63.7 million of
gains from previously impaired securities.
(2) Fixed maturity securities loss on disposals includes $23.3 million of
credit related losses.
(3) Equity securities gain on disposal includes $1.5 million of gains from
equity securities received as settlement compensation from an investee
whose securities had previously been impaired.
The hedging adjustments in the fixed maturities and mortgage loans asset
classes are non-cash adjustments representing the amortization or reversal of
prior fair value adjustments on assets in those classes that were or are
designated as hedged items in a fair value hedge. When an asset or liability is
so designated, its cost basis is adjusted in response to movements in interest
rates. These adjustments are non-cash and reverse with the passage of time as
the asset or liability and derivative mature.
Premiums decreased $0.4 million from the prior year. The decrease in
premiums was due to a $39.7 million decline in the Corporate and Other Segment
due to the sale of the group life insurance business and $2.4 million decline in
the G&SFP Segment. This decrease was offset by a growth in the Asset Gathering
Segment where growth in the immediate annuity business drove premiums up 82.0%,
or $14.6 million, and the Protection Segment which increased $27.1 million due
to higher sales and continued low lapse rates in the long-term care insurance
business.
Universal life and investment-type product fees increased 1.0%, or $4.7
million, from the prior year. The growth in product fees was driven by the
Protection Segment, where product fees increased 2.0%, or $6.6 million. This
increase was driven by growth of the existing business and the acquisition of
the Allmerica fixed universal life insurance business as of December 31, 2002.
In addition, the G&SFP Segment increased $1.2 million, or 3.4%, primarily due to
higher asset-based fees. Partially offsetting the growth in product fees in the
Protection and G&SFP Segments is a decline of $3.1 million in product fees in
the Asset Gathering Segment. Asset Gathering Segment product fees earned in the
variable annuity business decreased due to a 6.1% decline in average fund
values.
Net investment income increased 5.7%, or $152.0 million, from the prior
year. The growth in net investment income was driven by the Asset Gathering
Segment which increased 24.6%, or $103.2 million, from the prior year on growth
of the
41
JOHN HANCOCK LIFE INSURANCE COMPANY
fixed annuity business. Average invested assets in the fixed annuity business
increased 34.1% while earned rates decreased. See additional analysis in the
Asset Gathering Segment MD&A. In addition, net investment income increased in
the Protection Segment by 7.5%, or $73.6 million, from the prior year due to a
15.9% increase in average asset balances partially offset by a decrease in
yields. In addition, net investment income increased $8.2 million in the
Corporate and Other Segment driven by returns in the corporate account and the
holding company. G&SFP Segment net investment income decreased $36.6 million, or
2.9%, due to the declining interest rates despite the growth in the average
invested assets backing spread-based products. The average yield on invested
assets decreased to 5.82% as a reflection of the lower interest rate environment
in the current period. Net investment income varies with market rates because
the return on approximately $11.0 billion of the asset portfolio floats with
market rates. Matching the interest rate exposure on our asset liabilities is a
central feature of our asset/liability management process. For additional
analysis of net investment income and yields see the General Account Investments
section of this MD&A.
Advisory fees decreased 8.6%, or $35.0 million, from the prior year. The
decrease in fees was driven by the Asset Gathering Segment which decreased
12.4%, or $40.3 million, driven by the mutual funds business. The mutual funds
business management advisory fees declined $29.2 million driven by a decline in
average assets under management of $653.8 million, or 2.4% from prior year. In
addition, advisory fees increased in the Corporate and Other Segment by $2.7
million and in the Investment Management Segment by $2.7 million driven by the
northwest property management group.
Other revenue increased 8.8%, or $15.3 million, from the prior year. The
Company's other revenue is largely made up of Signature Fruit in the Corporate
and Other Segment, the Segment other revenue increased $8.1 million. Signature
Fruit revenue increased $8.6 million to $178.2 million for the current period.
In addition, other revenue increased $5.8 million in the Protection Segment
driven by the Federal long-term care insurance business which officially began
operation on October 1, 2002. The Federal long-term care insurance business is a
fee business where the Company administers and supports employee long-term care
insurance benefits offered by the Federal Government to its employees
Benefits to policyholders decreased $2.0 million from the prior year.
Driving the decrease in benefits to policyholders was the 8.9%, or $79.7
million, decline in the G&SFP Segment. Lower benefits to policyholders in the
G&SFP Segment were primarily due to lower interest credited on account balances
for spread-based products. The decrease in spread-based interest credited was
8.0%, or $61.1 million , due to a decline in the average interest crediting rate
on account balances driven by the reset on floating rate liabilities. In
addition, the Corporate and Other Segment declined 20.4%, or $56.8 million due
to the accounting for the sale of the group life insurance business. The
decrease in benefits to policyholders was offset by the $76.0 million increase
in the Protection Segment, due to growth in the long-term care insurance
business and non-traditional life insurance business. The long term care
insurance business increased due to additions from premium growth and higher
claim volume on growth of the business during the period. The non-traditional
life insurance business grew on the acquisition of the Allmerica business as of
December 31, 2003. Benefits to policyholders increased in the Asset Gathering
Segment by 18.1%, or $58.5 million, driven by premium growth which drove up
reserves and higher interest credited in the fixed annuity business.
Operating costs and expenses increased 10.6%, or $97.8 million. Included
in the Company's operating cost and expense are all the operating expenses of
Signature Fruit in the Corporate and Other Segment. The increase in the
Company's operating costs and expenses were driven by the Corporate and Other
Segment, which increased 31.6%, or $70.5 million, due to an increase in the
corporate account and Signature Fruit. The corporate account increase in
expenses was driven by a $16.7 million increase in deficiency interest and $23.9
million increase in the net periodic pension costs. Signature Fruit's operating
expenses increased $7.0 million to $182.1 million in the current period. In
addition, operating costs and expenses increased $4.0 million in the Investment
Management Segment and $43.5 million in the G&SFP Segment due to higher
compensation costs. Partially offsetting these increases was a decrease in
operating cost and expenses of $19.0 million in the Asset Gathering Segment
driven by reductions in the mutual funds business on lower distribution and
selling expenses. In addition, Protection Segment operating costs and expenses
decreased 0.5%, or $1.2 million, primarily due to increases in benefit and
compensation expenses and higher amortization of the value of the business
acquired due to the addition of Allmerica assumed December 31, 2002. See Note 7
- - Severance to the unaudited consolidated financial statements.
Amortization of deferred policy acquisition costs decreased 26.7%, or
$68.8 million, from the prior year. The decrease in amortization of deferred
policy acquisition costs was driven by the Asset Gathering Segment which
decreased 33.2%, or $38.9 million from the prior year driven by the $36.1
million DAC Q3 2002 Unlocking previously mentioned and also lower variable
annuity amortization partially offset by higher amortization in the fixed
annuity business by account balance growth. In addition, the Protection Segment
amortization of deferred policy acquisition costs decreased 21.7%, or $30.1
million, due to the Q3 2002 Unlocking which resulted in $27.9 million of
amortization in the variable life insurance business in the prior year. Also a
factor in the decrease was an $8.6 million decrease in amortization of deferred
acquisition costs in the traditional life insurance business due to lower
contributions from the closed block.
42
JOHN HANCOCK LIFE INSURANCE COMPANY
Dividends to policyholders increased 1.0%, or $4.1 million, from the prior
year. The increase in dividends to policyholders was driven by the Corporate and
Other Segment, which increased $30.5 million due to accounting for the sale of
the group life insurance business. This increase was offset by a decrease in
dividends to policyholders of $24.6 million in the Protection Segment due to a
decrease in the dividend scale on traditional life insurance products effective
the beginning of the year.
Income taxes were $264.0 million in 2003, compared to $107.9 million for
2002. Our effective tax rate was 27.8% in 2003, compared to 22.7% in 2002. The
higher effective tax rate was primarily due to increased capital gains,
partially offset by increased affordable housing tax credits.
Results of Operations by Segment and Adjustments to GAAP Reported Net Income
In the first quarter of 2003, the Company implemented organizational
changes within the Corporate and Other Segment which resulted in the
reclassification of 2002 results for the Federal long-term care insurance
business to the Protection Segment. The reclassification associated with the
Federal long-term care insurance business has no impact on segment after- tax
operating income, or net income of the business. The reclassification increased
Protection Segment after-tax operating income and decreased Corporate and Other
Segment after-tax operating income by $0.2 million and $0.5 million for the
three and nine month periods ended September 30, 2002.
We operate our business in five segments: two segments primarily serve
retail customers, two segments serve institutional customers and our fifth
segment is the Corporate and Other Segment, which includes our international
operations, the corporate account and several run-off businesses. Our retail
segments are the Protection Segment and the Asset Gathering Segment. Our
institutional segments are the Guaranteed and Structured Financial Products
(G&SFP) Segment and the Investment Management Segment. For additional
information about the Company's business segments, please refer to the Company's
2002 Form 10-K.
We evaluate segment performance and base some of management's incentives
on segment after-tax operating income, which excludes the effect of net realized
investment and other gains and losses and other identified transactions. Total
segment after-tax operating income, which is a non-GAAP financial measure, is
determined by adjusting GAAP net income for net realized investment and other
gains and losses, extraordinary items, and certain other items, which we believe
are not indicative of overall operating trends. While these items may be
significant components in understanding and assessing our consolidated financial
performance, we believe that the presentation of segment after-tax operating
income enhances the understanding of our results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, segment after-tax operating income is not a substitute for net income
determined in accordance with GAAP.
A discussion of the adjustments to GAAP reported income, many of which
affect each operating segment, follows the table below. A reconciliation of
segment after-tax operating income, as adjusted, to GAAP reported net income
precedes each segment discussion.
43
JOHN HANCOCK LIFE INSURANCE COMPANY
Three Months Ended Nine Months Ended,
September 30, September 30,
2003 2002 2003 2002
---------------------------------------
(in millions)
Segment Data:
Segment after-tax operating income:
Protection Segment (1) .............................. $ 92.4 $ 65.8 $264.6 $215.7
Asset Gathering Segment ............................. 49.5 14.6 140.7 95.2
----------------- -----------------
Total Retail Segments ............................. 141.9 80.4 405.3 310.9
Guaranteed and Structured Financial Products
Segment ........................................... 63.7 68.3 208.1 204.5
Investment Management Segment ....................... 5.6 4.5 22.7 16.8
----------------- -----------------
Total Institutional Segments ...................... 69.3 72.8 230.8 221.3
Corporate and Other Segment (1) ..................... (12.7) 7.3 (21.5) 21.6
----------------- -----------------
Total segment after-tax operating income .......... 198.5 160.5 614.6 553.8
After-tax adjustments:
Net realized investment and other gains (losses) .. (40.8) (23.2) 71.8 (159.2)
Class action lawsuit .............................. -- -- -- (19.5)
Restructuring charges ............................. -- (4.0) -- (8.4)
----------------- -----------------
Total after-tax adjustments ................... (40.8) (27.2) 71.8 (187.1)
GAAP Reported:
Net income ........................................ $157.7 $133.3 $686.4 $366.7
================= =================
(1) In 2002, during its start-up phase, the Federal long-term care insurance
business was reported in the Corporate and Other Segment. Effective
January 1, 2003, the program and its prior year results were reclassified
from the Corporate and Other Segment to the Protection Segment.
Our GAAP reported net income was significantly affected by net realized
investment and other gains and losses and other identified transactions
presented above as after-tax adjustments. A description of these adjustments
follows.
In all periods, net realized investment and other gains (losses), except
for gains and losses from mortgage securitizations, have been excluded from
segment after-tax operating income because such data are often excluded by
analysts and investors when evaluating the overall financial performance of
insurers. Net realized investment and other gains and losses from mortgage
securitizations were not excluded from segment after-tax operating income
because we view the related gains and losses as an integral part of the core
business of those operations.
Net realized investment and other gains have been reduced by: (1)
amortization of deferred policy acquisition costs to the extent that such
amortization results from net realized investment and other gains (losses), (2)
the portion of net realized investment and other gains (losses) credited to
certain participating contractholder accounts and (3) the portion of net
realized investment and other gains (losses) credited to the policyholder
dividend obligation. We believe presenting net realized investment and other
gains (losses) in this format provides information useful in evaluating our
operating performance. This presentation may not be comparable to presentations
made by other insurers. Summarized below is a reconciliation of (a) net realized
investment and other gains (losses) per the consolidated financial statements
and (b) the adjustment made for net realized investment and other gains (losses)
to calculate segment after-tax operating income for periods indicated.
44
JOHN HANCOCK LIFE INSURANCE COMPANY
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------------------------------------
(in millions)
Net realized investment and other gains (losses) ...................... $(97.9) $(12.0) $ 85.1 $(258.4)
Add amortization of deferred policy acquisition costs related to net
realized investment and other gains (losses) ...................... 5.7 (14.9) (6.7) 9.5
Add (less) amounts credited to participating pension contractholder
accounts .......................................................... 6.9 11.0 8.6 18.9
Add (less) amounts credited to policyholder dividend obligation ....... 22.6 (21.9) 34.0 (19.3)
---------------------------------------
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs and amounts
credited to participating pension contractholders
per unaudited consolidated financial statements ................... (62.7) (37.8) 121.0 (249.3)
Add net realized investment and other (gains) losses
attributable to mortgage securitizations .......................... 0.7 (0.9) (8.8) (1.9)
---------------------------------------
Net realized investment and other gains (losses) net - pre-tax
adjustment to calculate segment operating income .................. (62.0) (38.7) 112.2 (251.2)
Less income tax effect ................................................ 21.2 15.5 (40.4) 92.0
---------------------------------------
Net realized investment and other gains (losses) - after-tax
adjustment to calculate segment operating income .................. $(40.8) $(23.2) $ 71.8 $(159.2)
=======================================
The Company incurred after-tax restructuring charges to reduce costs and
increase future operating efficiency by consolidating portions of our
operations. Additional information regarding restructuring costs is included in
Note 7 -- Severance in the notes to the unaudited consolidated financial
statements. After-tax restructuring costs, net of related pension curtailment
and other post employment benefit related gains, were $4.0 million and $8.4
million for the three and nine month periods ended September 30, 2002 and were
excluded from segment after-tax operating income. The Company incurred after-tax
restructuring costs of $0.4 million (pre-tax $0.6 million) and $6.5 million
(pre-tax $10.0 million) for the three and nine month periods ended September 30,
2003 which are included in segment after-tax operating income. Therefore,
segment after-tax operating income decreased in 2003 due to the Company's change
in treatment of this adjustment to segment after-tax operating income.
Therefore, if restructuring charges were treated similarly in the prior year,
2002 after-tax operating income as presented would have been lower by $4.0
million and $8.4 million for the three and nine month periods ended September
2002, respectively.
In 2002, the Company incurred a $19.5 million after-tax charge related to
the settlement of the Modal Premium class action lawsuit. The settlement
agreement involves policyholders who paid premiums on a monthly, quarterly, or
semi-annual basis rather than annually. The settlement costs are intended to
provide for relief to class members and for legal and administrative costs
associated with the settlement. In entering into the settlement, the Company
specifically denied any wrongdoing.
45
JOHN HANCOCK LIFE INSURANCE COMPANY
Protection Segment
The following table presents certain summary financial data relating to
the Protection Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------
Operating Results: (in millions)
Revenues
Premiums ........................................................ $ 377.5 $ 365.5 $1,112.5 $1,085.4
Universal life and investment-type product fees ................. 116.5 117.9 340.2 333.6
Net investment income ........................................... 355.0 329.5 1,049.6 976.0
Other revenues .................................................. 2.2 -- 5.9 0.1
--------------------- ---------------------
Total revenues .............................................. 851.2 812.9 2,508.2 2,395.1
Benefits and expenses
Benefits to policyholders ....................................... 480.6 440.6 1,387.1 1,296.9
Other operating costs and expenses .............................. 80.3 68.3 247.2 226.6
Amortization of deferred policy acquisition costs, excluding
amounts related to net realized investment and other
gains (losses) ................................................ 31.7 67.8 108.8 138.9
Dividends to policyholders ...................................... 119.0 126.2 366.7 391.3
--------------------- ---------------------
Total benefits and expenses ................................. 711.6 702.9 2,109.8 2,053.7
Segment pre-tax operating income (1) ................................. 139.6 110.0 398.4 341.4
Income taxes ......................................................... 47.2 44.2 133.8 125.7
--------------------- ---------------------
Segment after-tax operating income (1) ............................... 92.4 65.8 264.6 215.7
--------------------- ---------------------
After-tax adjustments: (1)
Net realized investment and other gains (losses) ................ (2.6) (12.2) (6.1) (49.3)
Restructuring charges ........................................... -- (0.6) -- (4.7)
Class action lawsuit ............................................ -- -- -- (18.7)
--------------------- ---------------------
Total after-tax adjustments ................................. (2.6) (12.8) (6.1) (72.7)
GAAP Reported:
Net income ........................................................... $ 89.8 $ 53.0 $ 258.5 $ 143.0
===================== =====================
Other Data:
Segment after-tax operating income (loss):
Non-traditional life (variable and universal life) .............. $ 35.9 $ 22.0 $ 102.3 $ 79.4
Traditional life ................................................ 26.7 25.0 78.3 81.9
Long-term care .................................................. 27.6 20.4 77.2 57.4
Federal long-term care (2) ...................................... 1.7 0.2 4.7 0.5
Other ........................................................... 0.5 (1.8) 2.1 (3.5)
--------------------- ---------------------
Segment after-tax operating income (1) ............................... $ 92.4 $ 65.8 $ 264.6 $ 215.7
(1) See "Results of Operations by Segment and Adjustments to GAAP Reported Net
Income" included in this MD&A.
(2) In 2002, during its start-up phase, the Federal long-term care insurance
business was reported in the Corporate and Other Segment. Effective
January 1, 2003, the program and its prior year results were reclassified
from the Corporate and Other Segment to the Protection Segment.
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Segment after-tax operating income increased 40.4%, or $26.6 million, from
the prior year. Non-traditional life insurance business after-tax operating
income increased 63.2%, or $13.9 million, primarily due to an increase in net
investment income and lower amortization of deferred policy acquisition costs
due to the Q3 2002 Unlocking of the deferred policy
46
JOHN HANCOCK LIFE INSURANCE COMPANY
acquisition costs (DAC) asset. Traditional life insurance business after-tax
operating income increased 6.8%, or $1.7 million. Long-term care insurance
business after-tax operating income increased 35.3%, or $7.2 million, resulting
from increased premiums and higher net investment income. Federal long-term care
insurance business after-tax operating income increased $1.5 million as the
business was in its start up phase in the prior period.
Revenues increased 4.7%, or $38.3 million. Premiums increased 3.3%, or
$12.0 million, primarily due to long-term care insurance premiums, which
increased 21.0%, or $24.0 million, driven by business growth from higher sales.
This increase was partially offset by a $12.0 million decrease in premiums in
the traditional life insurance business due to the run off of the closed block.
Universal life and investment-type product fees decreased 1.2%, or $1.4 million,
due primarily to a $10.4 million decrease in amortization of unearned revenue,
as the prior period included higher amortization of $12.3 million associated
with the Q3 2002 Unlocking (See Critical Accounting Policies in this MD&A). This
decrease is partially offset by the increase in the cost of insurance fees of
$8.8 million resulting from the addition of the Allmerica block of business
assumed as of December 31, 2002 and from growth in the existing business Segment
net investment income increased 7.7%, or $25.5 million, primarily due to a 15.9%
increase in average asset balances, partially offset by a 53 basis point
decrease in yields.
Benefits and expenses increased 1.2%, or $8.7 million. Benefits to
policyholders increased 9.1%, or $40.0 million, due primarily to the growth in
the non-traditional life insurance business. Non-traditional life insurance
business benefits to policyholders increased 39.0% or $26.7 million, from higher
interest credited of $13.0 million due to the growth of the business, higher
death claims net of reserves released of $4.4 million and an increase in other
benefit reserves of $9.3 million. Long-term care insurance business benefits and
expenses increased 22.2%, or $28.8 million, primarily due to additions to
reserves for premium growth and higher claim volume on growth of the business
during the period. The long-term care insurance business claims are being
incurred at an aggregate rate lower than assumed in calculating the reserves of
the business. Long-term care insurance business policies have increased to 681.6
thousand from 582.6 thousand in the prior year. Other operating costs and
expenses increased $12.0 million, primarily due to increases in IT spending,
compensation expenses, and higher amortization of the value of business acquired
due to the addition of Allmerica block as of December 31, 2002. Amortization of
deferred policy acquisition costs decreased 53.2% or $36.1 million, primarily
due to a $37.4 million decrease in the non-traditional life insurance business
driven by the Q3 2002 Unlocking which resulted in an additional $27.9 million of
amortization in the prior year. (See Critical Accounting Policies in this MD&A).
Also, there was a $2.5 million decrease in the traditional life insurance
business amortization of deferred policy acquisition costs due to lower
contributions from the closed block. These decreases were partially offset by a
$3.9 million increase in amortization of deferred policy acquisition costs from
the growth in the long-term care insurance business. Dividends to policyholders
decreased 5.8%, or $7.2 million, primarily due to a dividend scale cut for the
traditional life insurance business. The Segment's effective tax rate on
operating income was 33.8% compared to 40.2% for the prior year. The decrease
was primarily due to an increase in affordable housing credits, a decrease in
deficiency charge, and a net change in other permanent differences.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Segment after-tax operating income increased 22.7%, or $48.9 million, from
the prior year. Non-traditional life insurance business after-tax operating
income increased 28.8%, or $22.9 million, primarily due to increases in net
investment income and universal life and investment-type product fees and lower
amortization of deferred policy acquisition costs, partially offset by higher
expenses and higher benefits to policyholders. Long-term care insurance business
after-tax operating income increased 34.5%, or $19.8 million, resulting from
growth of the business. Federal long-term care insurance business after-tax
operating income increased $4.2 million as the business was in its start up
phase in the prior period. Traditional life insurance business after-tax
operating income decreased 4.3%, or $3.6 million, primarily resulting from
decreases in premiums and net investment income partially offset by a decrease
in total benefit and expenses, driven by lower dividends.
Revenues increased 4.7%, or $113.1 million. Premiums increased 2.5%, or
$27.1 million, primarily due to long-term care insurance premiums, which
increased 17.7%, or $59.2 million, driven by business growth from higher sales.
This increase was partially offset by a 4.3%, or $32.2 million decrease in the
traditional life insurance business premiums primarily due to the run off of the
closed block and the lower dividend scale causing purchase of fewer paid up
additions. Universal life and investment-type product fees increased 2.0%, or
$6.6 million, due primarily to cost of insurance fees of $21.1 million resulting
from growth in the existing business and the addition of the Allmerica block of
business assumed as of December 31, 2002. This increase is partially offset by
an $11.6 million decrease in unearned revenue, as the prior period included
higher amortization of unearned revenue of $12.3 million associated with the Q3
2002 Unlocking mentioned previously. Segment net investment income increased
7.5%, or $73.6 million, primarily due to a 15.8% increase in average asset
balances, partially offset by a 54 basis point decrease in yields.
47
JOHN HANCOCK LIFE INSURANCE COMPANY
Benefits and expenses increased 2.7%, or $56.1 million. Benefits to
policyholders increased 7.0%, or $90.2 million, due primarily to growth in
long-term care insurance business. Long-term care insurance business benefits
and expenses increased 19.3%, or $72.9 million, primarily due to additions to
reserves for premium growth and higher claim volume on growth of the business
during the period. The long-term care insurance business claims are being
incurred at an aggregate rate lower than assumed in calculating the reserves of
the business. Long-term care insurance business policies have increased to 681.6
thousand from 582.6 thousand in the prior year. The non-traditional life
insurance business had an increase in benefits to policyholders of $29.7
million, which was driven by a $38.1 million increase in interest credited on
higher current year account balances and the addition of the Allmerica business.
These increases were partially offset by lower death claims paid net of reserves
released and reinsurance ceded of $6.8 million due to not repeating higher
mortality experienced in the prior year. Total operating costs and expenses
increased 9.1%, or $20.6 million, primarily due to increases in benefit plan
expenses, IT spending, compensation expenses, and higher amortization of the
value of business acquired due to the addition of the Allmerica assumed December
31, 2002. Amortization of deferred policy acquisition costs decreased 21.7% or
$30.1 million due to the non-traditional life insurance business Q3 2002
Unlocking which resulted in an additional $27.9 million of amortization in the
prior year and an $8.6 million decrease in amortization of deferred policy
acquisition costs in the traditional life insurance business due to lower
contributions from the closed block. These decreases were partially offset by a
$6.5 million increase in the amortization of deferred policy acquisition costs
in the long-term care insurance business due to growth. Dividends to
policyholders decreased 6.3%, or $24.6 million, primarily due to a dividend
scale cut for the traditional life insurance business. The Segment's effective
tax rate on operating income was 33.6% compared to 36.8% for the prior year. The
decrease was primarily due to an increase in affordable housing credits, a
decrease in deficiency charge, and a net change in other permanent differences.
48
JOHN HANCOCK LIFE INSURANCE COMPANY
Asset Gathering Segment
The following table presents certain summary financial data relating to
the Asset Gathering Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------
(in millions)
Operating Results:
Revenues
Premiums ...................................................... $ 3.0 $ 9.5 $ 32.4 $ 17.8
Investment-type product fees .................................. 28.7 29.4 87.4 90.5
Net investment income ......................................... 179.2 147.9 522.1 418.9
Investment management revenues, commissions
and other fees .............................................. 98.2 98.4 285.2 325.5
Other revenues ................................................ 2.1 0.1 2.3 0.9
----------------------- -----------------------
Total revenues ............................................ 311.2 285.3 929.4 853.6
Benefits and expenses
Benefits to policyholders ..................................... 123.2 116.5 381.5 323.0
Other operating costs and expenses ............................ 87.8 79.2 261.9 272.8
Amortization of deferred policy acquisition costs, excluding
amounts related to net realized investment and other
gains (losses) .............................................. 25.4 66.9 78.4 117.3
Dividends to policyholders .................................... 0.1 -- 0.1 0.1
----------------------- -----------------------
Total benefits and expenses ............................... 236.5 262.6 721.9 713.2
Segment pre-tax operating income (1) ............................... 74.7 22.7 207.5 140.4
Income taxes ....................................................... 25.2 8.1 66.8 45.2
----------------------- -----------------------
Segment after-tax operating income (1) ............................. 49.5 14.6 140.7 95.2
----------------------- -----------------------
After-tax adjustments: (1)
Net realized investment and other gains (losses), net ......... (7.2) 34.5 (18.5) 6.5
Restructuring charges ......................................... -- (3.1) -- (5.0)
----------------------- -----------------------
Total after-tax adjustments ............................... (7.2) 31.4 (18.5) 1.5
GAAP Reported:
Net income ......................................................... $ 42.3 $ 46.0 $ 122.2 $ 96.7
======================= =======================
Other Data:
Segment after-tax operating income:
Annuity (fixed and variable) .................................. $ 35.6 $ (0.3) $ 103.2 $ 48.3
Mutual funds .................................................. 13.7 14.3 34.2 41.6
Other ......................................................... 0.2 0.6 3.3 5.3
Mutual fund assets under management, end of period ................. 27,948.7 24,654.1 27,948.7 24,654.1
(1) See "Results of Operations by Segment and Adjustments to GAAP Reported Net
Income" included in this MD&A.
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Segment after-tax operating income was $49.5 million, an increase of $34.9
million from the prior year. The variable annuity business increase of $29.4
million in after-tax operating income resulted primarily from the Q3 2002
Unlocking, which did not recur in the current period, and due to better separate
account performance in the current period. In addition to the increase in the
variable annuity business, the fixed annuity after-tax operating income
increased 28.1%, or $6.5 million, due to higher interest spreads and account
balance growth as a result of increased deposits through 2003. Offsetting the
increase in segment after-tax operating income in the annuity businesses was a
decrease in the mutual fund segment's after-tax
49
JOHN HANCOCK LIFE INSURANCE COMPANY
operating income of 4.2%, or $0.6 million. Signature Services after-tax
operating income decreased $0.3 million, driven by a decrease in management
advisory fee revenue. After-tax operating income for Essex, a distribution
subsidiary primarily serving the financial institution channel, increased $0.3
million and Signator Investors after-tax operating income decreased $0.1
million.
Revenues increased 9.1%, or $25.9 million, from the prior year period. The
rise in revenue was due to a $31.3 million increase in net investment income and
a $6.5 million decrease in premiums, driven by the immediate annuity business.
The increase in net investment income was primarily due to increases in invested
assets backing fixed annuity products, partially offset by lower earned yields
in the portfolio. Average invested assets backing fixed annuity products
increased 30.3% to $10,777.4 million while the average investment yield
decreased 53 basis points from the prior year. These increases in revenue were
partially offset by a decrease in premium revenue of $6.5 million related to
lower sales of single premium immediate annuities. In addition to the decrease
in premium revenue, investment management revenues decreased 0.3%, or $0.3
million, primarily from the lower service fee in Signature Services driven by a
reduction in the number of open accounts compared to the prior year.
Investment-type product fees decreased $0.7 million primarily in the variable
annuity business on lower surrender fees driven by improved lapse rates. For
variable annuities the mortality and expense fees as a percentage of average
account balances were 1.30% and 1.34% for the current and prior year.
Investment management revenues, commissions, and other fees decreased
0.2%, or $0.2 million, from the prior year. Average mutual fund assets under
management were $27,746.6 million, an increase of $2,305.9 million, or 9.1%,
from the prior year. The increase in average mutual fund assets under management
was primarily due to market appreciation of $479.6 million during the quarter,
as compared to market depreciation of $1,774.6 million in the prior year. Ending
mutual fund assets under management increased by $3,294.6 million or 13.4% from
the prior year period primarily due to $3,051.9 million in market appreciation
since September 30, 2002. The mutual fund business experienced net redemptions
of $2.4 million during the third quarter of 2003 compared to net deposits of
$273.1 million in the prior year, a change of $275.5 million. This change was
primarily due to a decrease in deposits of $303.1 million, partially offset by a
decrease in redemptions of $20.9 million. The decrease in deposits was primarily
due to a decline in institutional advisory account sales of $303.3 million.
Prior year results included the acquisition of two large advisory accounts.
Investment advisory fees increased 10.0%, or $3.6 million, to $38.9 million,
from the prior period and were 0.56% of average mutual fund assets under
management for the three months ended September 30, 2003 and 2002. Underwriting
and distribution fees decreased 5.8%, or $2.8 million, to $45.4 million compared
to the prior year period. Asset based 12b-1 fees declined by $0.8 million due to
a decrease in eligible assets under management compared to the comparable
quarter. Commission revenue declined by $2.0 million, primarily due to a
decrease in B-share redemptions and a decline in the effective rate of its
related fees. Shareholder service and other fees were $13.9 million compared to
$10.4 million in the prior year.
Benefits and expenses decreased 10.0 %, or $26.2 million, from the prior
year period. Benefits to policyholders increased 5.6%, or $6.7 million,
primarily due to a $15.4 million increase in interest credited on fixed annuity
account balances due to higher average account balances offset by a $5.6 million
decrease in reserve provisions for life-contingent immediate fixed annuity fund
values. Partially offsetting the increase in benefits to policyholders was a
decline in amortization of deferred policy acquisition costs of 62.0%, or $41.5
million, from the prior year period. This was primarily due to the Q3 2002
Unlocking which resulted in $36.1 million additional amortization of deferred
policy acquisition costs. Also contributing to the decrease in the amortization
of deferred policy acquisition cost is the decrease in the variable annuity
business driven by the strong separate account performance in the current
quarter. The Segment's effective tax rate on operating income was 33.7% and
35.7% for the three months ended September 30, 2003 and 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Segment after-tax operating income was $140.7 million, an increase of
47.8%, or $45.5 million from the prior year period. Fixed annuity after-tax
operating income increased 40.1%, or $24.2 million, from September 30, 2002. The
fixed annuity business grew due to higher interest spreads on higher account
balances due to growth. The variable annuity business after-tax operating income
increased $30.7 million to $18.5 million for the nine month period ended
September 30, 2003 compared to the prior year. The variable annuity business
increase resulted primarily from the Q3 2002 Unlocking which did not recur in
the current period. Mutual fund business after-tax operating income declined
17.8%, or $7.4 million, primarily due to a 12.3%, or $29.2 million, decrease in
management advisory fees, partially offset by a 29.2%, or $20.0 million decrease
in commissions. Signature Services after-tax operating income decreased $0.4
million to $2.0 million, driven by a decrease in management advisory fees
revenue. After-tax operating income for Essex, a distribution subsidiary
primarily serving the financial institution channel, decreased $1.5 million from
$1.5 million in the prior year. Signator Investors after-tax operating income
decreased $0.1 million.
Revenues increased 8.9%, or $75.8 million, from the prior year. The rise
in revenue was due to a $103.2 million increase in net investment income and a
$14.6 million increase in premiums, driven by the immediate annuity business.
The
50
JOHN HANCOCK LIFE INSURANCE COMPANY
increase in net investment income was primarily due to increases in invested
assets backing fixed annuity products, partially offset by lower earned yields
in the portfolio. Average invested assets backing fixed annuity products
increased 34.1% to $10,055.8 million and the average investment yield decreased
66 basis points from the prior year. These increases in revenue were partially
offset by a decrease in investment management revenues, primarily from the
mutual fund business, of 12.4%, or $40.3 million, and a $3.1 million decrease in
investment-type product fees, primarily in the variable annuity business on
lower average fund values. Investment-type product fees decreased mostly due to
a decline in the average variable annuity fund values of 6.1%, or $349.9
million, to $5,382.5 million from the prior year period. The decrease in average
account values was due to poor long-term separate account returns in the prior
year. For variable annuities the mortality and expense fees as a percentage of
average account balances were 1.30% and 1.35% for the current and prior year.
Investment management revenues, commissions, and other fees decreased
12.4%, or $40.3 million from the prior year. Average mutual fund assets under
management were $26,673.2 million, a decrease of $653.8 million, or 2.4% from
the prior year period. The decrease in average mutual fund assets under
management is primarily due to a lower beginning asset under management balance
compared to September 30, 2002 and is offset by market appreciation. Ending
mutual fund assets under management increased by $3,294.6 million or 13.4% from
the prior year period primarily due to $3,051.9 million in market appreciation
since September 30, 2002. The mutual fund business experienced net redemptions
of $249.5 million during the first nine months of 2003, as compared to net
redemptions of $390.7 million in the prior year, a change of $141.2 million.
This change was primarily due to an increase in deposits of $404.5 million
offset by an increase in redemptions of $297.6 million. The increase in deposits
was driven by the increase in closed-end fund sales, which increased from $622.2
million to $1.4 billion. Current year results included $299.6 million in
deposits from the sale of the John Hancock Preferred Income II Fund and $1.1
billion in deposits from the sale of the John Hancock Preferred Income III Fund.
Prior year sales included $622.2 million in deposits from the sale of the first
John Hancock Preferred Income Fund. The increase in closed-end fund sales was
partially offset by a $302.1 million decrease in institutional advisory account
sales. The increase in redemptions was primarily due to a $700 million
redemption from the John Hancock Variable Series Trust Active Bond account.
Offsetting this increase was a decline in retail mutual fund redemptions of
$413.7 million, with decreases across a number of funds. Investment advisory
fees decreased 6.7%, or $7.8 million, to $109.1 million, from the prior period
and were 0.55% and 0.57% of average mutual fund assets under management for the
nine months ended September 30, 2003 and 2002, respectively. Underwriting and
distribution fees decreased 17.6%, or $28.4 million, to $133.3 million compared
to the prior year period. Asset based 12b-1 fees declined by $14.6 million due
to a decrease in eligible assets under management compared to the prior year.
Commission revenue declined by $13.5 million primarily due to lower
commissionable sales due to increased wrap account sales and a decrease in CDSC
income. Shareholder service and other fees were $42.9 million compared to $32.4
million in the prior year.
Benefits and expenses increased 1.2%, or $8.7 million from the prior year
period. Benefits to policyholders increased 18.1%, or $58.5 million, primarily
due to a $41.1 million increase in interest credited on fixed annuity account
balances and $19.5 million higher reserve provisions for life-contingent
immediate fixed annuity fund values on higher sales of these contract types.
Partially offsetting the increase in benefits to policyholders was a decline in
commissions expense of 16.4% or $34.7 million, from the prior year period,
primarily due to lower expenses in the mutual fund business. Amortization of
deferred policy acquisition costs decreased 33.2%, or $38.9 million, from the
prior year. This decrease was driven by the $36.1 million Q3 2002 Unlocking of
the DAC asset previously mentioned and also lower variable annuity amortization
partially offset by higher fixed annuity amortization driven by account balance
growth. The Segment's effective tax rate on operating income was 32.2% for the
nine months ended September 30, 2003 and 2002.
51
JOHN HANCOCK LIFE INSURANCE COMPANY
Guaranteed and Structured Financial Products Segment
The following table presents certain summary financial data relating to
the Guaranteed and Structured Financial Products Segment for the periods
indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------
(in millions)
Operating Results:
Revenues
Premiums ................................................... $ 3.7 $ 4.7 $ 11.6 $ 14.0
Investment-type product fees ............................... 10.5 13.5 36.1 34.9
Net investment income ...................................... 399.4 427.4 1,239.0 1,275.6
Other revenue .............................................. 0.4 0.2 0.5 0.6
--------------------- ---------------------
Total revenues ......................................... 414.0 445.8 1,287.2 1,325.1
Benefits and expenses
Benefits to policyholders .................................. 267.3 298.0 814.0 893.6
Other operating costs and expenses ......................... 44.8 36.6 144.6 100.3
Amortization of deferred policy acquisition costs,
excluding amounts related to net realized investment
and other gains ........................................ 0.5 0.5 1.6 1.6
Dividends to policyholders ................................. 8.3 10.2 24.9 26.8
--------------------- ---------------------
Total benefits and expenses ........................... 320.9 345.3 985.1 1,022.3
Segment pre-tax operating income (1) ........................... 93.1 100.5 302.1 302.8
Income taxes ................................................... 29.4 32.2 94.0 98.3
--------------------- ---------------------
Segment after-tax operating income (1) ......................... 63.7 68.3 208.1 204.5
--------------------- ---------------------
After-tax adjustments: (1)
Net realized investment and other gains (losses) ........... (26.7) (47.4) (104.0) (116.8)
Restructuring charges ...................................... -- -- -- (0.5)
--------------------- ---------------------
Total after-tax adjustments .................................... (26.7) (47.4) (104.0) (117.3)
GAAP Reported:
Net income ..................................................... $ 37.0 $ 20.9 $ 104.1 $ 87.2
===================== =====================
Other Data:
Segment after-tax operating income: (1)
Spread-based products ...................................... $ 60.8 $ 61.5 $ 196.0 $ 186.4
Fee-based products ......................................... 2.9 6.8 12.1 18.1
--------------------- ---------------------
Segment after-tax operating income (1) ......................... $ 63.7 $ 68.3 $ 208.1 $ 204.5
===================== =====================
(1) See "Results of Operations by Segment and Adjustments to GAAP Reported Net
Income" included in this MD&A.
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Segment after-tax operating income decreased 6.7% or $4.6 million from
the prior year. Spread-based products after-tax operating income decreased 1.1%
or $0.7 million due to the increased level of reinsurance arrangements,
partially offset by growth in investment spreads of 0.6% or $0.7 million. The
growth in investment spreads was a result of a higher average invested asset
base, which increased 7.7% or $1.8 billion over the prior year, partially offset
by a 14 basis point decrease in the interest rate margin. Fee-based products
after-tax operating income decreased 57.4% or $3.9 million from the prior year,
primarily due to higher taxes combined with lower general account risk charges
and lower earnings on risk-based capital.
52
JOHN HANCOCK LIFE INSURANCE COMPANY
Revenues decreased 7.1% or $31.8 million from the prior year, primarily as
a result of lower net investment income. Premiums decreased 21.3% or $1.0
million from the prior year. Investment-type product fees decreased 22.2%, or
$3.0 million from the prior year, primarily due to lower asset-based fees.
Driven by declining interest rates, net investment income decreased 6.6%, or
$28.0 million despite growth in the average invested assets backing spread-based
products. The average yield on invested assets decreased to 5.46%, reflecting
the lower interest rate environment in the current period. Net investment income
varies with market interest rates as the return on approximately $11 billion of
the asset portfolio floats with market rates. Matching the interest rate
exposure on our asset portfolio to the exposure on our liabilities is a central
feature of our asset/liability management process.
Benefits and expenses decreased 7.1%, or $24.4, million from the prior
year. The decrease was driven by lower benefits to policyholders partially
offset by higher operating costs and expenses. Benefits to policyholders
decreased 10.3% or $30.7 million primarily due to lower interest credited on
account balances for spread-based products. Spread-based interest credited
decreased 9.7%, or $25.0 million, from the prior year. The decrease in interest
credited was due to a decline in the average interest credited rate on account
balances for spread-based products, as liabilities with floating rates reset.
The average crediting rate fell to 4.09%. The decrease in benefits to
policyholders was offset by an increase in other operating costs and expenses of
22.4%, or $8.2 million, from the prior year. The increase was primarily due to
an increase in investment income transferred on reinsurance ceded combined with
higher pension and compensation costs. Dividends to contractholders also
declined 18.6%, or $1.9 million. The segment's effective tax rate on operating
income was 31.6% compared to 32.0% in the prior year.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Segment after-tax operating income increased 1.8%, or $3.6 million, from
the prior year. Spread-based products after-tax operating income increased 5.2%,
or $9.6 million, which was attributable to an increase in investment spreads of
11.1% or $38.0 million from the prior year partially offset by higher
reinsurance expenses. The growth in investment spreads was a result of a higher
average invested asset base, which increased 10.1% or $2.3 billion over the
prior year. Fee-based products after-tax operating income decreased 33.1% or
$6.0 million from the prior year, primarily due to higher taxes combined with
lower general account risk charges and lower earnings on risk-based capital.
Revenues decreased 2.9%, or $37.9 million, from the prior year, primarily
as a result of lower net investment income. Premiums decreased 17.1% or $2.4
million from the prior year. Investment-type product fees increased 3.4% or $1.2
million from the prior year, primarily due to higher asset-based fees. Driven by
declining interest rates, net investment income decreased 2.9% or $36.6 million
despite the growth in the average invested assets backing spread-based products.
The average yield on invested assets decreased to 5.82%, reflecting the lower
interest rate environment in the current period. Net investment income varies
with market interest rates as the return on approximately $11 billion of the
asset portfolio floats with market rates. Matching the interest rate exposure on
our asset portfolio to the exposure on our liabilities is a central feature of
our asset/liability management process.
Benefits and expenses decreased 3.6% or $37.2 million from the prior year.
The decrease was driven by lower benefits to policyholders largely offset by
increased operating costs and expenses. Benefits to policyholders decreased
8.9%, or $79.6 million, primarily due to lower interest credited on account
balances for spread-based products. Spread-based interest credited decreased
8.0%, or $61.1 million, from the prior year. The decrease in interest credited
was due to a decline in the average interest credited rate on account balances
for spread-based products, as liabilities with floating rates reset. The average
crediting rate fell to 4.22%. Partially offsetting the decrease in benefits to
policyholders was an increase in other operating costs and expenses of 44.2% or
$44.3 million, from the prior year. The increase was primarily due to an
increase in investment income transferred on reinsurance ceded combined with
higher pension and compensation costs. Dividends to contractholders declined
7.1%, or $1.9 million. The segment's effective tax rate on operating income was
31.1% compared to 32.5% in the prior year.
53
JOHN HANCOCK LIFE INSURANCE COMPANY
Investment Management Segment
The following table presents certain summary financial data relating to
the Investment Management Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------- ----------------------
(in millions)
Operating Results:
Revenues
Net investment income ................. $ 2.7 $ 3.3 $ 14.4 $ 10.9
Net realized investment and other
gains (losses) (1) ................. (0.7) 0.9 8.9 1.9
Investment management revenues,
commissions and other fees ......... 29.9 26.3 84.3 81.6
----------------------- ----------------------
Total revenues .................. 31.9 30.5 107.6 94.4
Benefits and expenses
Other operating costs and expenses .... 23.3 22.2 71.1 66.8
----------------------- ----------------------
Total benefits and expenses ..... 23.3 22.2 71.1 66.8
Segment pre-tax operating income (1) ...... 8.6 8.3 36.5 27.6
Income taxes .............................. 3.0 3.8 13.8 10.8
----------------------- ----------------------
Segment after-tax operating income (1) .... 5.6 4.5 22.7 16.8
After-tax adjustments: (1)
Net realized investment and other
gains (losses) (1) ................. -- (0.1) -- 0.4
Restructuring charges ................. -- -- -- (0.2)
----------------------- ----------------------
Total after-tax adjustments ..... -- (0.1) -- 0.2
GAAP Reported:
Net income ................................ $ 5.6 $ 4.4 $ 22.7 $ 17.0
======================= ======================
Other Data:
Segment assets under management, end
of period (2) ....................... $29,055.0 $25,878.3 $29,055.0 $25,878.3
(1) See "Results of Operations by Segment and Adjustments to GAAP Reported Net
Income" included in this MD&A.
(2) Includes general account cash and invested assets of $386.6 million and
$343.1 million at September 30, 2003 and 2002, respectively.
Three Months Ended September 30, 2003 Compared to Three Months
Ended September 30, 2002
Segment after-tax operating income increased $1.1 million, or 24.4%, from
the prior year quarter. The increase was primarily due to $3.6 million in higher
investment management revenues, commissions and other fees, partially offset by
$1.6 million in lower net realized and other investment gains (losses), $0.6
million in lower net investment income and $1.1 million in higher operating
expenses.
Revenues increased $1.4 million, or 4.6%, from the prior year quarter. Net
realized investment gains on mortgage securitizations decreased $1.7 million, to
a loss of $0.8 million, from a gain of $0.9 million in the prior year quarter at
John Hancock Real Estate Finance. Net realized investment and other losses of
$0.7 million in the current period are the result of SFAS No. 133 accounting on
mortgages committed and held for sale.
54
JOHN HANCOCK LIFE INSURANCE COMPANY
Net investment income was down $0.6 million, primarily resulting from lower
income earned on a lower average amount of mortgages held for sale. Investment
management revenues, commissions, and other fees increased $3.6 million, or
13.7%, from the prior year quarter. Fee income increased $2.6 million in the
current quarter at the Company's Bond and Corporate Finance Group primarily from
its general partnership investment in private equity funds. Fee income increased
$2.3 million at the Hancock Natural Resource Group from a $1.9 million increase
in property management fees at the new northwest property management division
established in December of 2002, and $0.4 million in higher investment
management fees on higher assets under management in the current quarter. One of
the Hancock Natural Resource Group's strategies is to vertically integrate the
timber business and the establishment of the northwest property management
division is another step taken to implement that strategy. Commercial mortgage
origination fees at John Hancock Real Estate Finance increased $0.6 million from
higher loan originations for the Company's General Account. Advisory fees at the
Company's institutional advisor, the Independence group of companies
(Independence) increased $0.2 million, or 1.5%. Average assets under management
in the current quarter at Independence increased $2.0 billion, or 11.0%,
compared to the prior year, including a continuing shift towards fixed income
assets which have lower fee rates. These increases in fee revenue were offset by
a decrease in fee income of $2.2 million at John Hancock Realty Advisors mostly
due to lower acquisition activity. Investment management revenue, commissions
and other fees were 0.41% and 0.40% of average advisory assets under management
for the current and prior year quarters, respectively.
Total benefits and expenses increased $1.1 million, or 5.0%, from the
prior year quarter. Operating expenses increased $1.1 million, or 5.0%.
Operating expenses at the Hancock Natural Resource Group increased $1.3 million,
or 27.1%, including $1.2 million of expenses associated with the new northwest
property management division established in December of 2002. Operating expenses
at Independence increased $1.2 million, or 10.9%, based on $1.0 million of
increased incentive compensation expenses and $0.4 million of increased
severance costs associated with the closing down of the high net worth
management group offset by savings from ongoing cost reduction efforts. These
increases were partially offset by a decrease in operating expenses of $0.6
million, or 20.7%, at the Company's Bond and Corporate Finance Group due to
lower corporate expense allocations based on lower assets under management, a
decrease of $0.6 million, or 50.0%, at John Hancock Realty Advisors mostly on
lower acquisition activity, and a decrease of $0.2 million, or 8.7%, at John
Hancock Real Estate Finance mainly from lower incentive compensation expenses.
Operating expenses were 0.32% and 0.33% of average advisory assets under
management for the current and prior year. Commission expenses at the Hancock
Natural Resource Group were unchanged at $0.1 million in both the current and
prior year.
The Segment's effective tax rate on operating income fell to 34.9% from
45.8% for the prior year quarter, primarily due to a one time adjustment in the
prior year quarter for 2001 taxes. The effective tax rate for the Investment
Management Segment remains higher than for our other U.S.-based business
operating segments due to state taxes on certain investment management
subsidiaries, and reduced tax benefits from portfolio holdings in this segment.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Segment after-tax operating income increased $5.9 million, or 35.1%, from
the prior year. The increase was primarily due to $7.0 million in higher net
realized investment gains, mainly on mortgage securitizations, $3.5 million in
higher net investment income, $2.7 million of higher fee income and $1.0 million
in lower sales commission expenses, partially offset by $5.3 million in higher
operating expenses.
Revenues increased $13.2 million, or 14.0%, from the prior year. Net
realized investment and other gains increased $7.0 million, to a gain of $8.9
million, primarily from mortgage securitizations at John Hancock Real Estate
Finance where realized gains increased $6.8 million, to a gain of $8.7 million,
from a gain of $1.9 million in the prior year. This increase in securitization
gains resulted from higher profitability on a higher volume of securitizations
in the current year. Net investment income increased $3.5 million, to $14.4
million, primarily resulting from increases in equity method income of $3.9
million on limited partnership energy investments at John Hancock Energy
Resources Management due to the required adoption of fair value accounting at
the limited partnership. Investment management revenues, commissions, and other
fees increased $2.7 million, or 3.3%, from the prior year. The Hancock Natural
Resources Group's property management fee revenue increased $5.1 million from
the new northwest property management division established in December of 2002
and $1.4 million in higher management fee income on higher assets under
management in the current year. One of the Hancock Natural Resource Group's
strategies is to vertically integrate the timber business and the establishment
of the northwest property management division is another step taken to implement
that strategy. Fee income increased $1.0 million in the current year at the
Company's Bond and Corporate Finance Group from increases of $3.3 million
primarily from its general partnership investment in private equity funds offset
by $2.3 million in lower fees on CBO and mezzanine funds. Fee income increased
$0.6 million at John Hancock Real Estate Finance primarily from a higher volume
of loans originated for the Company's General Account. At the Company's
institutional advisor, advisory fees were down $3.6 million, or 8.6%, from the
prior year. The lower fees at Independence, on $0.5 billion in higher average
assets under management reflect a shift towards fixed income assets which have
lower fee rates. Fee revenue at John Hancock Realty Advisors declined $1.9
million, or 26.8%, primarily from a
55
JOHN HANCOCK LIFE INSURANCE COMPANY
decrease of $2.4 million in acquisition fees offset by higher management fees of
$0.6 million in the current year. Investment management revenue, commissions and
other fees were 0.40% and 0.39% of average advisory assets under management for
the current and prior year.
Total benefits and expenses increased $4.3 million, or 6.4%, from the
prior year. Operating expenses increased $5.3 million, or 8.1%, from the prior
year. The increase was primarily due to an increase of $5.2 million, or 38.5%,
in operating expenses at the Hancock Natural Resource Group, which included $3.1
million of expenses associated with the new northwest property management
division established in December of 2002 and $2.4 million of increased incentive
compensation expenses offset by operating expense savings, primarily due to
ongoing cost reduction efforts. Operating expenses at Independence increased
$1.8 million, or 5.2%, resulting from increased incentive compensation expense,
severance costs associated with the closing down of the high net worth
management group and non-recurring prior year reductions, offset by operating
expense savings from ongoing cost reduction efforts. Operating expenses at John
Hancock Realty Advisors decreased $1.0 million, or 32.3%, due primarily to lower
acquisition expenses in the current year. Operating expenses at the other
investment management business units declined $0.7 million, or 5.0%, from the
prior year. Operating expenses were 0.33% and 0.31% of average advisory assets
under management for the current and prior year. Commission expenses at the
Hancock Natural Resource Group declined $1.0 million, from $1.3 million in the
prior year, based on significant new timberland investors signed in the prior
year.
The Segment's effective tax rate on operating income fell to 37.8% from
39.1% for the prior year, primarily due to a one time adjustment in the prior
year for 2001 taxes. The effective tax rate for the Investment Management
Segment remains higher than for our other U.S.-based business operating segments
due to state taxes on certain investment management subsidiaries, and reduced
tax benefits from portfolio holdings in this segment.
56
JOHN HANCOCK LIFE INSURANCE COMPANY
Corporate and Other Segment
The following table presents certain summary financial data relating to the
Corporate and Other Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------- -----------------
(in millions)
Operating Results:
Segment after-tax operating income(1)
International operations ................................. $ 3.1 $ 1.9 $ 6.4 $ 5.3
Corporate operations ..................................... (16.7) 4.6 (30.7) 12.7
Non-core businesses ...................................... 0.9 0.8 2.8 3.6
----------------- -----------------
Total ............................................. (12.7) 7.3 (21.5) 21.6
After-tax adjustments: (1)
Net realized investment and other gains (losses), net .... (4.3) 2.0 200.4 (0.0)
Restructuring charges .................................... 0.0 (0.3) 0.0 2.0
Class action lawsuit ..................................... 0.0 0.0 0.0 (0.8)
----------------- -----------------
Total after-tax adjustments ....................... (4.3) 1.7 200.4 1.2
GAAP Reported:
Net income .................................................. $(17.0) $ 9.0 $178.9 $ 22.8
================= =================
(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A.
(2) In 2002, during its start-up phase, the Federal long-term care insurance
business was reported in the Corporate and Other Segment. Effective
January 1, 2003, the program and its prior year results were reclassified
from the Corporate and Other Segment to the Protection Segment.
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Segment after-tax operating income from international operations increased
$1.2 million from the prior year. Our International Group Program's after-tax
operating income of $3.1 million was $1.2 million favorable compared to Q3 2002.
This is due to more earned retention income.
Segment after-tax operating loss from corporate operations increased $21.3
million from the prior year. Investment income on corporate surplus was $5.5
million favorable due to improved investment income relative to the surplus
requirements in our other business lines. Group life insurance business
after-tax operating income was $4.8 million lower reflecting the sale of the
group life insurance business to MetLife effective May 1, 2003. There was a
$14.7 million expense reimbursement to our holding company in the third quarter
of 2003 that did not occur in 2002. The primary difference for the remainder is
an expense reimbursement in this segment in the prior year that resulted from
expenses charged to the business units for services fees, accrued employee
incentive compensation and payroll taxes.
Segment after tax operating income from non-core businesses increased $0.1
million from the prior year because of a lower lapse rate in discontinued
business. We continue with the orderly run-off of business within this group.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Segment after-tax operating income from international operations increased
$1.1 million from the prior year. Our international group business after tax
income was $1.9 million higher due to higher earned retention income partially
offset by an operating loss in our Indonesia subsidiary.
Segment after-tax operating loss from corporate operations increased $43.4
million from the prior year. Investment income on corporate surplus was $16.6
million lower due to increased surplus requirements in our other business lines
as a result of the growth of capital intense business. Group life insurance
business after-tax operating income was $5.9 million lower reflecting a sale of
the group life insurance business to MetLife effective May 1, 2003. Our
corporate owned life insurance program increased $17.0 million due to an
increase in the asset base and primarily from the separate account assets
supporting the program were impacted by lower interest rates compared to year
end 2002. There was a $14.7 million expense reimbursement to our holding company
in the third quarter of 2003 that did not occur in 2002. Other expense increases
in our corporate account were driven by a $15.5 million increase for net
periodic pension costs and a $6.8 million provision for future benefits.
57
JOHN HANCOCK LIFE INSURANCE COMPANY
Segment after tax operating income from non-core businesses decreased $0.8
million from the prior year. We continue with the orderly run-off of business
within this group.
General Account Investments
We manage our general account assets in investment segments that support
specific classes of product liabilities. These investment segments permit us to
implement investment policies that both support the financial characteristics of
the underlying liabilities, and also provide returns on our invested capital.
The investment segments also enable us to gauge the performance and
profitability of our various businesses.
Asset/Liability Risk Management
Our primary investment objective is to maximize after-tax returns within
acceptable risk parameters. We are exposed to two primary types of investment
risk:
o Interest rate risk, meaning changes in the market value of fixed maturity
securities as interest rates change over time, and
o Credit risk, meaning uncertainties associated with the continued ability
of an obligor to make timely payments of principal and interest.
We use a variety of techniques to control interest rate risk in our
portfolio of assets and liabilities. In general, our risk management philosophy
is to limit the net impact of interest rate changes on our assets and
liabilities. Assets are invested predominantly in fixed income securities, and
the asset portfolio is matched with the liabilities so as to eliminate the
Company's exposure to changes in the overall level of interest rates. Each
investment segment holds bonds, mortgages, and other asset types that will
satisfy the projected cash needs of its underlying liabilities. Another
important aspect of our asset-liability management efforts is the use of
interest rate derivatives. We selectively apply derivative instruments, such as
interest rate swaps and futures, to reduce the interest rate risk inherent in
combined portfolios of assets and liabilities. For a more complete discussion of
our interest rate risk management practices, please see the Interest Rate Risk
section in the Quantitative and Qualitative Disclosures about Market Risk
section of this document.
Management of credit risk is central to our business and we devote
considerable resources to the credit analysis underlying each investment
acquisition. Our corporate bond management group includes a staff of highly
specialized, experienced, and well-trained credit analysts. We rely on these
analysts' ability to analyze complex private financing transactions and to
acquire the investments needed to profitably fund our liability requirements. In
addition, when investing in private fixed maturity securities, we rely upon
broad access to proprietary management information, negotiated protective
covenants, call protection features and collateral protection.
Our bond portfolio is reviewed on a continuous basis to assess the
integrity of current quality ratings. As circumstances warrant, specific
investments are "re-rated" with the adjusted quality ratings reflected in our
investment system. All bonds are evaluated regularly against the following
criteria:
o material declines in the issuer's revenues or margins;
o significant management or organizational changes;
o significant uncertainty regarding the issuer's industry;
o debt service coverage or cash flow ratios that fall below
industry-specific thresholds;
o violation of financial covenants; and
o other business factors that relate to the issuer.
Insurance product prices are impacted by investment results as well as
other results (e.g. mortality, lapse). Accordingly, incorporated in insurance
products prices are assumptions of expected default losses over the long-term.
Actual losses therefore vary above and below this average, and the market value
of the portfolio as a whole also changes as market credit spreads move up and
down during an economic cycle.
John Hancock is able to hold to this investment strategy over the long
term, both because of its strong capital position, the fixed nature of its
liabilities and the matching of those liabilities with assets and because of the
experience gained through many decades of a consistent investment philosophy. We
generally intend to hold all of our fixed maturity investments to maturity to
meet liability payments, and to ride out any unrealized gains and losses over
the long term. However, we do sell bonds under certain circumstances, such as
when new information causes us to change our assessment of whether a bond will
recover or perform according to its contractual terms, in response to external
events (such as a merger or a downgrade) that
58
JOHN HANCOCK LIFE INSURANCE COMPANY
result in investment guideline violations (such as single issuer or overall
portfolio credit quality limits), in response to extreme catastrophic events
(such as September 11, 2001) that result in industry or market wide disruption,
or to take advantage of tender offers.
Overall Composition of the General Account
Invested assets, excluding separate accounts totaled $66.9 billion and
$60.6 billion as of September 30, 2003 and December 31, 2002, respectively.
Although the portfolio composition has not significantly changed at September
30, 2003 as compared to December 31, 2002, invested assets have grown 10.5%. The
following table shows the composition of investments in the general account
portfolio.
As of September 30, As of December 31,
2003 2002
-------------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
-------------------------------------------------------------
(in millions) (in millions)
Fixed maturity securities (1)............ $ 49,382.5 73.8% $ 43,773.3 72.3%
Mortgage loans (2)....................... 10,625.7 15.9 10,296.5 17.0
Real estate.............................. 194.8 0.3 255.3 0.4
Policy loans (3)......................... 2,012.5 3.0 2,014.2 3.3
Equity securities........................ 375.5 0.5 350.3 0.6
Other invested assets (4)................ 3,002.0 4.5 2,839.1 4.7
Short-term investments................... 10.9 0.0 137.3 0.2
Cash and cash equivalents (5)............ 1,316.9 2.0 897.0 1.5
-------------------------------------------------------------
Total invested assets.................... $ 66,920.8 100.0% $ 60,563.0 100.0%
=============================================================
(1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $547.2 million and
$590.2 million as of September 30, 2003 and December 31, 2002,
respectively. The total fair value of the fixed maturity security
portfolio was $49,407.9 million and $43,823.5 million, at September 30,
2003 and December 31, 2002, respectively.
(2) The fair value for the mortgage loan portfolio was $11,553.6 million and
$11,220.7 million as of September 30, 2003 and December 31, 2002,
respectively.
(3) Policy loans are secured by the cash value of the underlying life
insurance policies and do not mature in a conventional sense, but expire
in conjunction with the related policy liabilities.
(4) Other invested assets as of December 31, 2002 contains a receivable of
$471.1 million from Allmerica Financial Corporation pursuant to the
Company's agreement to reinsure Allmerica's fixed universal life insurance
business. At September 30, 2003, the acquisition accounting was finalized
and these assets are reflected in the proper line items in the portfolio
detail above.
(5) Cash and cash equivalents are included in total invested assets in the
table above for the purposes of calculating yields on the income producing
assets for the Company.
Consistent with the nature of the Company's product liabilities, assets
are heavily oriented toward fixed maturity securities. The Company determines
the allocation of assets primarily on the basis of cash flow and return
requirements of its products and by the level of investment risk.
Fixed Maturity Securities. The fixed maturity securities portfolio is
predominantly comprised of low risk, investment grade, publicly and privately
traded corporate bonds and senior tranches of asset-backed securities (ABS) and
mortgage-backed securities (MBS). The fixed maturity securities portfolio also
includes redeemable preferred stock. As of September 30, 2003, fixed maturity
securities represented 73.8% of general account invested assets with a carrying
value of $49.4 billion, comprised of 52.3% public securities and 47.7% private
securities. Each year, the Company directs the majority of net cash inflows into
investment grade fixed maturity securities. Typically, between 5% and 15% of
funds allocated to fixed maturity securities are invested in below investment
grade bonds while maintaining a policy to limit the overall level of these bonds
to no more than 10% of invested assets and the majority of that balance in the
BB category. The Company has established a long-term target of limiting
investments in below investment grade bonds to 8% of invested assets by 2005 for
its U.S. life insurance companies on a statutory accounting basis. Allocations
are based on an assessment of relative value and the likelihood of enhancing
risk-adjusted portfolio returns. While the Company has profited from the
below-investment-grade
59
JOHN HANCOCK LIFE INSURANCE COMPANY
asset class in the past, care is taken to manage its growth strategically by
limiting its size relative to the Company's total assets.
The Securities Valuation Office (SVO) of the National Association of
Insurance Commissioners evaluates all public and private bonds purchased as
investments by insurance companies. The SVO assigns one of six investment
categories to each security it reviews. Category 1 is the highest quality
rating, and Category 6 is the lowest. Categories 1 and 2 are the equivalent of
investment grade debt as defined by rating agencies such as S&P and Moody's
(i.e., BBB /Baa3 or higher), while Categories 3-6 are the equivalent of
below-investment grade securities. SVO ratings are reviewed and may be revised
at least once a year.
The following table shows the composition by credit quality of the fixed
maturity securities portfolio.
Fixed Maturity Securities -- By Credit Quality
-------------------------------------------------------------------------
As of September 30, As of December 31,
2003 2002
-------------------------------------------------------------------------
SVO S&P Equivalent Carrying % of Carrying % of
Rating (1) Designation (2) Value (3)(4)(5) Total Value (3)(4)(5) Total
- ------------------------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A....................... $20,395.8 41.8% $17,590.5 40.7%
2 BBB............................ 22,696.4 46.5 20,406.6 47.3
3 BB............................. 2,558.5 5.2 2,574.9 6.0
4 B.............................. 1,893.8 3.9 1,215.3 2.8
5 CCC and lower.................. 812.4 1.6 775.8 1.8
6 In or near default............. 478.4 1.0 620.0 1.4
-------------------------------------------------------------------------
Subtotal................ 48,835.3 100.0% 43,183.1 100.0%
Redeemable preferred
stock.................. 547.2 590.2
-------------------------------------------------------------------------
Total fixed maturities.... $49,382.5 $43,773.3
=========================================================================
(1) For securities that are awaiting an SVO rating, the Company has assigned a
rating based on an analysis that it believes is equivalent to that used by
the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Includes 171 securities that are awaiting an SVO rating, with a carrying
value of $3,548.3 million as of September 30, 2003. Due to lags between
the funding of an investment, the processing of final legal documents, the
filing with the SVO, and the rating by the SVO, there will always be a
number of unrated securities at each statement date.
(4) Includes the effect of $130.0 million notional invested in the Company's
credit-linked note program, $110.0 million notional of written credit
default swaps on fixed maturity securities in the AAA/AA/A category and
$20.0 million notional of written credit default swaps on fixed maturity
securities in the BBB category. As of December 31, 2002 the Company had
$55.0 million notional invested in the Company's credit linked program,
$10.0 million notional of written credit default swaps on fixed maturity
securities in the AAA/AA/A category and $45.0 million notional of written
credit default swaps on fixed maturity securities in the BBB category.
(5) The Company entered into a credit enhancement agreement in the form of a
guaranty from a AAA rated financial guarantor in 1996. To reflect the
impact of this guaranty on the overall portfolio, the Company has
presented securities covered in aggregate by the guaranty at rating levels
provided by the SVO and Moody's that reflect the guaranty. As a result,
$113.8 million of SVO Rating 2, $525.5 million of SVO Rating 3, $210.4
million of SVO Rating 4, and $7.6 million of SVO Rating 5 underlying
securities are included as $644.2 million of SVO Rating 1, $159.8 million
of SVO Rating 2 and $53.3 million of SVO Rating 3 as of September 30, 2003
and $94.0 million of SVO Rating 2, $718.0 million of SVO Rating 3, and
$141.3 million of SVO Rating 4 underlying securities are included as
$753.2 million of SVO Rating 1, $150.1 million of SVO Rating 2 and $50.0
million of SVO Rating 3 as of December 31, 2002. The guaranty also
contains a provision that the guarantor can recover from the Company
certain amounts paid over the history of the program in the event a
payment is required under the guaranty. As of September 30, 2003 and
December 31, 2002, the maximum amount that can be recovered under this
provision was $105.2 million and $82.3 million, respectively.
60
JOHN HANCOCK LIFE INSURANCE COMPANY
The table above sets forth the SVO ratings for the bond portfolio along
with an equivalent S&P rating agency designation. The majority of the rated
fixed maturity investments are investment grade, with 88.2% and 88.0% of fixed
maturity investments invested in Category 1 and 2 securities as of September 30,
2003 and December 31, 2002, respectively. Below investment grade bonds were
11.8% and 12.0% of the rated fixed maturity investments as of September 30, 2003
and December 31, 2002, respectively, and 8.6% of total invested assets at each
period end. This allocation reflects the Company strategy of avoiding the
unpredictability of interest rate risk in favor of relying on the Company's bond
analysts' ability to better predict credit or default risk. The bond analysts
operate in an industry-based, team-oriented structure that permits the
evaluation of a wide range of below investment grade offerings in a variety of
industries resulting in a well-diversified high yield portfolio.
Valuation techniques for the bond portfolio vary by security type and the
availability of market data. Pricing models and their underlying assumptions
impact the amount and timing of unrealized gains and losses recognized, and the
use of different pricing models or assumptions could produce different financial
results. External pricing services are used where available, broker dealer
quotes are used for thinly traded securities, and a spread pricing matrix is
used when price quotes are not available, which typically is the case for our
private placement securities. The spread pricing matrix is based on credit
quality, country of issue, market sector and average investment life and is
created for these dimensions through brokers' estimates of public spreads
derived from their respective publications. When utilizing the spread pricing
matrix, securities are valued through a discounted cash flow method where each
bond is assigned a spread that is added to the current U.S. Treasury rates to
discount the cash flows of the security. The spread assigned to each security is
changed from month to month based on changes in the market. Certain market
events that could impact the valuation of securities include issuer credit
ratings, business climate, management changes, litigation, and government
actions among others. The resulting prices are then reviewed by the pricing
analysts and members of the Controller's Department. The Company's pricing
analysts take appropriate actions to reduce valuations of securities where such
an event occurs that negatively impacts the securities' value. Although the
Company believes its estimates reasonably reflect the fair value of those
securities, the key assumptions about risk premiums, performance of underlying
collateral (if any) and other factors involve significant assumptions and may
not reflect those of an active market. To the extent that bonds have longer
maturity dates, management's estimate of fair value may involve greater
subjectivity since they involve judgment about events well into the future.
Then, every quarter, there is a comprehensive review of all impaired securities
and problem loans by a group consisting of the Chief Investment Officer and the
Bond Investment Committee, including the Corporate Risk Officer who reports to
the Chief Financial Officer. The valuation of impaired bonds for which there is
no quoted price is typically based on the present value of the future cash flows
expected to be received. If the company is likely to continue operations, the
estimate of future cash flows is typically based on the expected operating cash
flows of the company that are available to make payments on the bonds. If the
company is likely to liquidate, the estimate of future cash flows is based on an
estimate of the liquidation value of its net assets.
As of September 30, 2003 and December 31, 2002, 44.5% and 49.7% of our
below investment grade bonds are in Category 3, the highest quality below
investment grade. Category 6 bonds, those in or near default, represent
securities that were originally acquired as long-term investments, but
subsequently became distressed. The carrying value of bonds in or near default
was $478.4 million and $620.0 million as of September 30, 2003 and December 31,
2002, respectively. As of September 30, 2003 and December 31, 2002, $5.3 million
and $10.7 million, respectively, of interest on bonds near default were included
in accrued investment income. Unless the Company reasonably expects to collect
investment income on bonds in or near default, the accrual will be ceased and
any accrued income reversed. Management judgment is used and the actual results
could be materially different.
Bonds rated Category 5 by the SVO decreased by $336.7 million for the
quarter but increased by $36.6 million for the nine month period ended September
30, 2003. Approximately $150 million of the decrease for the quarter was due to
net upgrades by the SVO, $181 million is due to sales, maturities, and
prepayments, and $11 million is due to a decrease in market values.
In keeping with the investment philosophy of tightly managing interest
rate risk, the Company's MBS & ABS holdings are heavily concentrated in
commercial MBS where the underlying loans are largely call protected, which
means they are not pre-payable without penalty prior to maturity at the option
of the issuer. By investing in MBS and ABS securities with relatively
predictable repayments, the Company adds high quality, liquid assets to our
portfolios without incurring the risk of cash flow variability. The Company
believes the portion of its MBS/ABS portfolio subject to prepayment risk as of
September 30, 2003 and December 31, 2002 was limited to approximately $1,662
million and $988 million, respectively, or 19.3% and 13.1%, respectively of our
total MBS/ABS portfolio and 3.4% and 2.3%, respectively, of our total fixed
maturity securities holdings, at each period end.
61
JOHN HANCOCK LIFE INSURANCE COMPANY
The following table shows the composition by our internal industry
classification of the fixed maturity securities portfolio and the unrealized
gains and losses contained therein.
Fixed Maturity Securities -- By Industry Classification
As of September 30, 2003
-----------------------------------------------------------------------------------------
Carrying
Value of Carrying Value
Securities with of Securities
Total Net Gross Gross with Gross Gross
Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
-----------------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ............. $ 6,270.9 $ 385.7 $ 5,513.3 $ 400.0 $ 757.6 $ (14.3)
Communications .................. 3,318.2 251.5 2,956.7 274.7 361.5 (23.2)
Government ...................... 3,081.3 142.4 2,042.8 153.6 1,038.5 (11.2)
Manufacturing ................... 7,562.5 435.7 6,144.6 521.6 1,417.9 (85.9)
Oil & gas ....................... 4,763.5 339.1 4,125.7 422.3 637.8 (83.2)
Services / trade ................ 2,709.2 216.4 2,478.7 226.7 230.5 (10.3)
Transportation .................. 2,766.8 89.2 1,944.1 178.7 822.7 (89.5)
Utilities ....................... 9,128.2 445.9 6,887.2 608.2 2,241.0 (162.3)
Other ........................... -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Total corporate securities ........ 39,600.6 2,305.9 32,093.1 2,785.8 7,507.5 (479.9)
Asset-backed and mortgage-
backed securities ................. 8,632.8 216.9 6,401.4 397.4 2,231.4 (180.5)
U.S. Treasury securities and
obligations of U.S. government
agencies .......................... 186.6 5.9 147.7 6.5 38.9 (0.6)
Debt securities issued by foreign
governments ....................... 248.3 15.3 152.8 23.4 95.5 (8.1)
Obligations of states and political
subdivisions ...................... 714.2 19.8 510.5 23.3 203.7 (3.5)
-----------------------------------------------------------------------------------------
Total .......................... $49,382.5 $ 2,563.8 $39,305.5 $ 3,236.4 $10,077.0 $ (672.6)
=========================================================================================
62
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification
As of December 31, 2002
----------------------------------------------------------------------------------
Carrying
Value of
Securities Carrying Value
with of Securities
Total Net Gross Gross with Gross Gross
Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
----------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance .............. $ 5,469.0 $ 213.2 $ 4,361.7 $ 264.0 $ 1,107.3 $ (50.8)
Communications ................... 2,204.5 86.4 1,815.8 137.6 388.7 (51.2)
Government ....................... 2,570.5 120.7 1,805.1 139.7 765.4 (19.0)
Manufacturing .................... 7,211.3 202.4 5,502.8 384.6 1,708.5 (182.2)
Oil & gas ........................ 4,318.1 85.0 3,305.7 274.4 1,012.4 (189.4)
Services / trade ................. 2,422.5 118.9 2,088.6 135.4 333.9 (16.5)
Transportation ................... 2,740.5 28.9 2,044.4 158.2 696.1 (129.3)
Utilities ........................ 8,482.3 (168.3) 5,426.7 354.0 3,055.6 (522.3)
Other ............................ 0.1 -- -- -- 0.1 --
----------------------------------------------------------------------------------
Total corporate securities ......... 35,418.8 687.2 26,350.8 1,847.9 9,068.0 (1,160.7)
Asset-backed and mortgage-
backed securities .................. 7,523.1 138.0 5,858.9 414.0 1,664.2 (276.0)
U.S. Treasury securities and
obligations of U.S. government
agencies ........................... 184.4 8.7 183.3 8.7 1.1 --
Debt securities issued by foreign
governments ........................ 325.0 33.5 316.9 36.0 8.1 (2.5)
Obligations of states and political
subdivisions ....................... 322.0 22.6 318.7 22.6 3.3 --
----------------------------------------------------------------------------------
Total .............................. $43,773.3 $ 890.0 $33,028.6 $ 2,329.2 $10,744.7 $(1,439.2)
==================================================================================
As of September 30, 2003 and December 31, 2002, there are gross unrealized
gains of $3,236.4 million and $2,329.2 million, and gross unrealized losses of
$672.6 million and $1,439.2 million on the fixed maturities portfolio. As of
September 30, 2003 gross unrealized losses of $672.6 million include $601.4
million, or 89.4%, of gross unrealized losses concentrated in the utilities,
manufacturing, oil and gas, transportation, and asset-backed and mortgage-backed
securities. The tables above show gross unrealized losses before amounts that
are allocated to the closed block policyholders or participating pension
contractholders. Of the $672.6 million of gross unrealized losses in the
portfolio at September 30, 2003, $88.4 million was in the closed block and $30.0
million has been allocated to participating pension contractholders, leaving
$554.2 million of gross unrealized losses after such allocations. The 2002 gross
unrealized losses of $1,439.2 million included $1,299.2 million, or 90.3%, of
gross unrealized losses concentrated in the utilities, manufacturing, oil and
gas, transportation, and asset-backed and mortgage-backed securities. Only the
utilities sector has net unrealized losses. The tables above show gross
unrealized losses before amounts that were allocated to the closed block
policyholders or participating pension contractholders. Of the $1,439.2 million
of gross unrealized losses in the portfolio at December 31, 2002, $191.0 million
was in the closed block and $62.6 million was allocated to participating pension
contractholders, leaving $1,185.6 million of gross unrealized losses after such
allocations.
Manufacturing: Manufacturing is a large, diverse sector encompassing
cyclical industries. Low commodity prices have pressured the subsectors of
mining, chemicals, metals, and forest products. We are beginning to see
commodity price improvement as the U.S. economy begins to recover and as the
growth in demand for China continues to grow. The higher prices have translated
into better earnings and, as a result, many of the bonds in this sector have
recovered. The more troublesome subsectors continue to be chemicals and forest
products. We have financed these subsectors though several economic cycles and
will typically hold our investments until they recover in value or mature. Our
portfolio also benefits from our underwriting process where we stress test each
company's financial performance through a recession scenario.
63
JOHN HANCOCK LIFE INSURANCE COMPANY
Oil & Gas: In the Oil & Gas industry, much of our unrealized loss arises
from companies in emerging markets, primarily Latin America and particularly in
Venezuela. Our philosophy in emerging markets is to generally lend to those
companies with dollar based export products such as oil companies. Emerging
markets continue to experience significant stress and bond prices across most
emerging market countries are down. However, our oil & gas investments are
faring well as these companies have dollar based revenues to pay their debts and
have continued to do so. In many cases, deals are structured so that all export
revenues first pass through an offshore trust and our debt service is then paid
before any dollars are released back to the company. This type of transaction is
known as an export receivables deal. All of our Venezuelan transactions are
structured in this manner. The strike in Venezuela raised the risk profile of
our oil transactions in this country, because the investments we have in
Venezuela require oil production in order for these deals to produce payments.
The gross unrealized loss on our Venezuelan oil and gas holdings was $62.7
million and $105.5 million as of September 30, 2003 and December 31, 2002,
respectively. The improvement in the gross unrealized loss is largely due to the
end of the Venezuelan old strike and the increase in oil production to
approximately 80%-100% of pre-strike levels. We expect further price recovery in
these bonds as the market becomes comfortable that these production levels will
continue.
Transportation: The Transportation sector consists largely of air, rail,
and automotive manufacturers and service companies. All of these subsectors are
experiencing cyclical downturns, particularly the airline industry, having been
hit both by the recession and the fallout from September 11, 2001. We lend to
this industry almost exclusively on a secured basis (approximately 99% of our
loans are secured). These secured airline financings are of two types: Equipment
Trust Certificates (ETC's) and Enhanced Equipment Trust Certificates (EETC's).
The ETC's initially have an 80% loan-to-value ratio and the EETC senior tranches
initially have a 40-50% loan-to-value and include a provision for a third party
to pay interest for eighteen months from a default. For us to lose money on an
ETC, three things must happen: the airline must default; the airline must decide
it does not want to fly our aircraft, and the aircraft must be worth less than
our loan. When lending to this industry, we underwrite both the airline and the
aircraft. We've been lending to this industry in this fashion for 25 years
through several economic cycles and have seen values on our secured airline
bonds fall and recover thorough these cycles. EETC's are classified as
asset-backed securities and they account for $96.9 million and $180.1 million of
the $180.5 million and $276.0 million of gross unrealized loss in the
asset-backed and mortgage-backed securities category as of September 30, 2003
and December 31, 2002, respectively. While the airline industry is making
positive strides in reducing its cost structure, a significant recovery in this
sector requires a growing economy and a pick up in business travel. In the most
recent quarter ending September 30, 2003, most of the major carriers have
reported improved financial results. This trend is encouraging and we expect it
to continue barring any new terrorist events or a reversal of the course of the
U.S. economy. We continue to expect that the senior secured nature of our loans
to this industry will protect our holdings through this difficult time.
Utilities: The Utility sector has faced a number of challenges over the
past few years including the California Power Crisis, the Enron bankruptcy and
the recession which slowed the growth in demand. More recently, there have been
issues around energy trading activities and the financial liquidity of some
large merchant industry players. These events caused a general widening in
utility and project finance bond spreads over the course of 2002. We expect some
continued stress in this sector as owners of merchant plants work through their
liquidity issues with the banks. Investors are likely to see continued
restructurings and/or bankruptcy filings from those companies unable to reach
agreement with the banks. Longer term, we believe the reduction in power supply
from reduced capital expenditures and the shutting of inefficient plants will
support a gradual rise in power prices that will help this sector recover. Thus
far this year, there are a number of positive signs in this sector as power
prices have increased and, most importantly, banks are more willing to refinance
their maturing lines, albeit often on a secured basis. As a result, prices in
power sector bonds have improved significantly, as shown by the reduction in
gross unrealized loss on our utility sector bonds from $522.3 million as of
December 31, 2002 to $162.3 million as of September 30, 2003.
Asset-backed and mortgage-backed securities: As described above, as of
September 30, 2003 and December 31, 2002, the main driver of the unrealized loss
in this category is $96.9 million and $180.1 million of gross unrealized loss on
EETC's with a GAAP book value of $668.1 million and $745.8 million,
respectively. This $96.9 million and $180.1 million of gross unrealized loss
represent 54% and 65% of the total gross unrealized loss in this category.
EETC's are financings secured by a pool of aircraft. The vast majority of our
EETC holdings ($661.3 million of the $668.1 million as of September 30, 2003 and
$713.1 million of the $745.8 million as of December 31, 2003) are the most
senior tranches in the EETC structure. The most senior tranches are generally
structured to have an initial loan-to-value of 40-50%. Given the drop in airline
passenger traffic and the financial difficulties of most of the major carriers,
aircraft values have dropped significantly and hence EETC's have declined in
64
JOHN HANCOCK LIFE INSURANCE COMPANY
price, although prices have firmed over the past quarter. We still expect that
most of the senior tranche EETC have enough subordination and asset coverage to
ensure full and timely repayment. The major risk to this portfolio is a further
decline in passenger traffic due to a reversal in the economic recovery or
increased terrorist activity, further depressing aircraft values. Thus far, we
have never lost money on a senior tranche EETC even though some of aircraft
backing our transactions have been leased to airlines that have gone out of
business. The improved financial results of the airline industry in the 3rd
quarter and the resulting stabilization of aircraft values should set the stage
for improving EETC bond prices. Nevertheless, we remain concerned over further
terrorist events or a setback in the U.S. economy.
The following table shows the composition by credit quality of the
securities with gross unrealized losses in our fixed maturity securities
portfolio. The gross unrealized loss on investment grade bonds (those rated in
categories 1 and 2 by the SVO) declined by $279.8 million in the nine months
ending September 30, 2003 to $245.1 million. The gross unrealized loss on below
investment grade bonds (those rated in categories 3, 4, 5, and 6 by the SVO)
declined even more over this period, dropping by $486.3 million to a total of
$416.5 million as of September 30, 2003.
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of September 30, 2003
-----------------------------------------------------------------
Carrying Value of
Securities with Gross
SVO S&P Equivalent Unrealized Gross % of Unrealized
Rating (1) Designation (2) Losses (3) Total Losses (3) % of Total
- -----------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A................. $ 4,660.1 47.2% $ (126.6) 19.1%
2 BBB...................... 2,425.8 24.6 (118.5) 17.9
3 BB....................... 930.7 9.4 (113.7) 17.2
4 B........................ 1,134.7 11.5 (184.6) 27.9
5 CCC and lower............ 545.5 5.5 (102.4) 15.5
6 In or near default....... 177.9 1.8 (15.8) 2.4
-----------------------------------------------------------------
Subtotal........... 9,874.7 100.0% (661.6) 100.0%
Redeemable preferred
stock.............. 202.3 (11.0)
-----------------------------------------------------------------
Total.................... $10,077.0 $ (672.6)
=================================================================
(1) With respect to securities that are awaiting rating, the Company has
assigned a rating based on an analysis that it believes is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Includes 66 securities with gross unrealized losses that are awaiting an
SVO rating with a carrying value of $1,602.4 million and unrealized losses
of $22.1 million. Due to lags between the funding of an investment, the
processing of final legal documents, the filing with the SVO, and the
rating by the SVO, there will always be a number of unrated securities at
each statement date. Unrated securities comprised 15.9% and 3.3% of the
total carrying value and total gross unrealized losses of securities in a
loss position, including redeemable preferred stock, respectively.
65
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of December 31, 2002
-------------------------------------------------------------------
Carrying Value of Gross
SVO S&P Equivalent Securities with Gross % of Unrealized
Rating (1) Designation (2) Unrealized Losses (3) Total Losses (3) % of Total
- -------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A................. $ 3,134.5 29.9% $ (148.2) 10.4%
2 BBB...................... 4,109.8 39.2 (376.7) 26.4
3 BB....................... 1,622.1 15.5 (410.3) 28.7
4 B........................ 708.5 6.8 (218.4) 15.3
5 CCC and lower............ 541.2 5.2 (193.6) 13.6
6 In or near default....... 362.4 3.4 (80.5) 5.6
-------------------------------------------------------------------
Subtotal............ 10,478.5 100.0% (1,427.7) 100.0%
Redeemable preferred
stock............... 266.2 (11.5)
-------------------------------------------------------------------
Total.................... $10,744.7 $(1,439.2)
===================================================================
(1) With respect to securities that are awaiting rating, the Company has
assigned a rating based on an analysis that it believes is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Includes 59 securities with gross unrealized losses are awaiting an SVO
rating with a carrying value of $1,658.1 million and unrealized losses of
$62.7 million. Due to lags between the funding of an investment, the
processing of final legal documents, the filing with the SVO, and the
rating by the SVO, there will always be a number of unrated securities at
each statement date. Unrated securities comprised 15.4% and 4.4% of the
total carrying value and total gross unrealized losses of securities in a
loss position, including redeemable preferred stock, respectively.
Unrealized Losses on Fixed Maturity Securities -- By Investment Grade and Age
As of September 30, 2003
---------------------------------------------- --------------------------------------------
Investment Grade Below Investment Grade
---------------------------------------------- --------------------------------------------
Carrying Value of Carrying Value of
Securities with Securities with
Gross Unrealized Hedging Market Gross Unrealized Hedging Market
Losses Adjustments Depreciation Losses Adjustments Depreciation
- -------------------------------------------------------------------------------------- --------------------------------------------
(in millions) (in millions)
Three months or less ......... $2,273.6 $ (12.9) $ (32.0) $ 208.7 $ (2.1) $ (2.1)
Greater than three months
to six months ............. 1,573.5 (2.9) (51.7) 160.9 (4.2) (12.4)
Greater than six months
to nine months ............ 311.1 (14.5) (5.1) 208.8 (1.9) (6.5)
Greater than nine months
to twelve months .......... 880.0 (4.6) (19.8) 188.4 (2.3) (7.8)
Greater than twelve months .. 2,047.7 (54.1) (47.5) 2,022.0 (93.7) (283.5)
---------------------------------------------- --------------------------------------------
Subtotal ................ 7,085.9 (89.0) (156.1) 2,788.8 (104.2) (312.3)
---------------------------------------------- --------------------------------------------
Redeemable preferred stock ... 202.3 -- (11.0) -- -- --
---------------------------------------------- --------------------------------------------
Total ................... $7,288.2 $ (89.0) $ (167.1) $2,788.8 $ (104.2) $ (312.3)
============================================== ============================================
66
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Investment Grade and Age
As of December 31, 2002
----------------------------------------------- ---------------------------------------------
Investment Grade Below Investment Grade
----------------------------------------------- ---------------------------------------------
Carrying Value of Carrying Value of
Securities with Securities with
Gross Unrealized Hedging Market Gross Unrealized Hedging Market
Losses Adjustments Depreciation Losses Adjustments Depreciation
- ------------------------------------------------------------------------------------- ---------------------------------------------
(in millions) (in millions)
Three months or less ........ $2,159.6 $ (19.3) $ (46.9) $ 272.5 $ (2.2) $ (12.9)
Greater than three months
to six months ............. 868.6 (15.7) (31.6) 398.2 (6.9) (110.3)
Greater than six months
to nine months ............ 914.3 (36.3) (23.9) 561.3 (14.3) (77.8)
Greater than nine months
to twelve months .......... 293.3 (9.7) (23.6) 388.9 (4.7) (59.6)
Greater than twelve months .. 3,008.5 (69.8) (248.1) 1,613.3 (75.3) (538.8)
----------------------------------------------- ---------------------------------------------
Subtotal ............... 7,244.3 (150.8) (374.1) 3,234.2 (103.4) (799.4)
----------------------------------------------- ---------------------------------------------
Redeemable preferred stock .. 266.2 -- (11.5) -- -- --
----------------------------------------------- ---------------------------------------------
Total .................. $7,510.5 $ (150.8) $ (385.6) $3,234.2 $ (103.4) $ (799.4)
=============================================== =============================================
The tables above shows the Company's investment grade and below investment
grade securities that were in a loss position at September 30, 2003 and December
31, 2002 by the amount of time the security has been in a loss position. Gross
unrealized losses from hedging adjustments represent the amount of the
unrealized loss that results from the security being designated as a hedged item
in a fair value hedge. When a security is so designated, its cost basis is
adjusted in response to movements in interest rates. These adjustments, which
are non-cash and reverse with the passage of time as the asset and derivative
mature, impact the amount of unrealized loss on a security. The remaining
portion of the gross unrealized loss represents the impact of interest rates on
the non-hedged portion of the portfolio and unrealized losses due to
creditworthiness on the total fixed maturity portfolio.
As of September 30, 2003 and December 31, 2002, respectively, the fixed
maturity securities had a total gross unrealized loss of $479.4 million and
$1,185.0 million, excluding basis adjustments related to hedging relationships.
Of these totals, $358.6 million and $870.1 million, respectively, are due to
securities that have had various amounts of unrealized loss for more than nine
months. Of this, $67.3 million and $271.7 million, respectively comes from
securities rated investment grade. Unrealized losses on investment grade
securities principally relate to changes in interest rates or changes in credit
spreads since the securities were acquired. Credit rating agencies statistics
indicate that investment grade securities have been found to be less likely to
develop credit concerns.
As of September 30, 2003 and December 31, 2002, $291.3 million and $598.4
million, respectively, of the $479.4 million and $1,185.0 million resided in
below investment grade securities with various amounts of unrealized loss for
over nine months. At September 30, 2003, all of these securities were current as
to the payments of principal and interest with the exception of 8 securities
with a carrying value of $19.9 million and an unrealized loss of $17.4 million.
Of the total $291.3 million, $142.2 million traded above 80% of amortized cost
at September 30, 2003 and an additional $49.0 million traded above 80% of
amortized cost within the last nine months, for a total of $191.2 million. Of
the total, $191.2 million in this category, utility related bonds made up $75.0
million. As described earlier, the utility sector suffered from oversupply and
slower than expected demand last year. This led to many credit quality
downgrades in the sector and corresponding price declines. We have seen evidence
of improvement in the utility sector recently as companies have curtailed
expansion plans and sold assets to conserve cash flow and strengthen their
balance sheets. On the other hand, $51.5 million of this $191.2 million total
comes from airline related bonds and this sector has been slower to recover, but
has shown recent signs of improvement. While, as described earlier, we expect
the secured nature of our positions to protect our value, the increased stress
in this industry is of concern.
Unrealized Losses as of September 30, 2003
As of September 30, 2003, the remaining portion of the unrealized loss,
$100.1 million, arises from below investment grade securities that have traded
below 80 percent of amortized cost for over nine months. All of these bonds are
current on payments of principal and interest and we believe, based on currently
available information that it is probable that
67
JOHN HANCOCK LIFE INSURANCE COMPANY
these securities will continue to pay based on their original terms. We
carefully track these investments to ensure our continued belief that their
prices will recover. More detail on the most significant securities is contained
below:
o $52.8 million on five secured airline bonds: $33.6 million on senior
tranche EETC's, $17.9 million on ETC's, and $1.3 million on
subordinated tranche of an EETC. The EETC's are backed by planes of
an airline currently in bankruptcy. These EETC's however, are all
current due to the 18 month liquidity facility with which to make
interest payments and in all three positions, the total loan balance
of the senior tranche is still less than the current appraised value
of the underlying aircraft. Accordingly, we expect the market prices
of these bonds to recover. The ETC's and the subordinated EETC are
backed by planes of major US airline that we do not expect to file
for bankruptcy and hence we expect the bond to recover.
o $21.0 million on a fertilizer plant that sources its natural gas
from PDVSA, the Venezuelan oil company. While the cost of the
natural gas is very inexpensive, there are concerns about the
reliability of the supply. Also, the plant experienced some start up
operational difficulties that now appear to have been fixed.
Additionally, its equity sponsors have supported the project with
additional contributions of equity and based on our review of this
credit we expect their continued support. Hence, we expect the price
to continue to recover.
o $15.7 million from a structured investment based on oil and gas
payments to an Argentine province. This transaction benefits from
(1) rights to 80% of the royalty payments received by the province,
(2) a six month debt service reserve located in the U.S., and (3) a
political risk insurance policy from a major reinsurer that will
take over payments in the event the government imposes transfer or
currency conversion limitations. Currently, the major risk is that
the local oil and gas companies are making payments to the province
based on a fixed exchange rate rather than the market exchange rate.
While the province is working to correct this, if it does not change
we will need to dip into the debt service reserve account for a
portion of the debt service payments this year and we will
ultimately need to restructure our rights to royalty payments to
extend beyond the maturity of our notes, so a restructuring would
likely extend the term of our note with interest.
o $6.1 million on the bond of a major telecommunications company. A
major portion of the value of this company is derived from its local
exchange business. The company has taken steps to de-leverage and is
expected to be in a positive cash flow position this year. As the
company continues to reduce leverage through cost cutting and asset
dispositions, we expect these securities to continue to recover in
value.
o $3.9 million arises from a structured receivables transaction based
on the export of soybeans from a major soybean producer in
Argentina. The international buyers of the soybeans make payment to
an offshore trust with our debt service paid before any dollars flow
back to the Argentine company. We expect this structure to continue
to protect our debt service payments.
The Company's investment grade and below investment grade bonds trading at
less than 80% of amortized cost for more than one year amounted to $90.4 million
in September 30, 2003 down $63.3 million, or 41.2% from December 31, 2002.
Approximately half of that amount is associated with U.S. dollar denominated
structured receivables in Venezuela and Argentina, some of which are analyzed
above.
The Company believes, however, that after its comprehensive review of each
borrower's ability to meet the obligations of the notes, and based on
information available at this time, these securities will continue to pay as
scheduled, and the Company has the ability and the intent to hold these
securities until they recover in value or matures. The scheduled maturity dates
for securities in an unrealized loss position at September 30, 2003 and December
31, 2002 is shown below.
68
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Maturity
September 30, 2003 December 31, 2002
---------------------------------- -----------------------------------
Carrying Value of Carrying Value of
Securities with Gross Securities with Gross
Gross Unrealized Unrealized Gross Unrealized Unrealized
Loss Loss Loss Loss
---------------------------------- -----------------------------------
(in millions) (in millions)
Due in one year or less................... $ 418.3 $ (11.8) $ 554.9 $ (35.5)
Due after one year through five years..... 1,785.8 (107.9) 2,473.7 (268.4)
Due after five years through ten years.... 1,892.5 (157.8) 2,478.4 (418.6)
Due after ten years....................... 3,749.0 (214.6) 3,573.5 (440.7)
---------------------------------- -----------------------------------
7,845.6 (492.1) 9,080.5 (1,163.2)
Asset-backed and mortgage-backed
securities.............................. 2,231.4 (180.5) 1,664.2 (276.0)
---------------------------------- -----------------------------------
Total..................................... $10,077.0 $(672.6) $10,744.7 $(1,439.2)
================================== ===================================
As of September 30, 2003 we had 91 securities representing 17 credit
exposures that had an unrealized loss of $10 million or more. They include:
Description of Issuer Amortized Cost Unrealized Loss
- ----------------------------------------------------------------------------------------------------------------
(In Millions)
Venezuelan oil company with US dollar based flows......................... $ 154.5 $ (25.8)
Notes secured by leases on a pool of aircraft ............................ 35.1 (21.5)
Argentinean trust holding rights to oil and gas royalty .................. 43.6 (20.9)
Secured financings to large US airline ................................... 117.7 (20.8)
Joint venture with a Venezuelan oil company .............................. 41.3 (16.4)
Securitized investment of aircraft ....................................... 224.8 (16.3)
Major US airline ......................................................... 159.6 (15.1)
US natural gas fired power generator ..................................... 82.2 (14.9)
UK subsidiary of large US power generator ................................ 63.0 (14.4)
Major US airline ......................................................... 74.0 (14.2)
Major US airline.......................................................... 180.2 (14.1)
Notes secured by leases on a pool of aircraft ............................ 52.1 (13.1)
Lease financing with US fossil fuel power generation ..................... 84.2 (11.9)
Joint venture with a Venezuelan oil company and a large US oil company ... 61.8 (11.5)
Large US based merchant energy generator ................................. 69.9 (11.4)
Finance subsidiary of US paper/wood products manufacturer ................ 207.0 (10.3)
US power generator with multiple plants................................... 98.9 (10.0)
-----------------------------------
Total.............................................................. $1,749.9 $ (262.6)
-----------------------------------
Unrealized losses improved modestly during the third quarter of 2003. As
of June 30, 2003, there were 85 securities with an unrealized loss of $10
million or more with an amortized cost of $1,696.4 million and unrealized loss
of $281.0 million. The area of most concern continues to be the airline sector
and it represents 7 names on the list. All of the above securities have
undergone thorough analysis by our investment professionals, and at this time we
believe that the borrowers have the financial capacity to make all required
contractual payments on the notes when due, and we intend to hold these
securities until they either mature or recover in value.
69
JOHN HANCOCK LIFE INSURANCE COMPANY
Mortgage Loans. As of September 30, 2003 and December 31, 2002, the
Company held mortgage loans with a carrying value of $10.6 billion and $10.3
billion, including $2.9 billion and $2.6 billion respectively, of agricultural
loans at each period end and $7.7 billion and $7.7 billion, respectively, of
commercial loans. Impaired loans comprised 1.0% and 0.4% of the mortgage
portfolio as of September 30, 2003 and December 31, 2002, respectively. The
Company's average historical impaired loan percentage during the period of 1997
through 2002 is 1.5%. This historical percentage is higher than the current 1.0%
because the historical percentage includes some remaining problem assets of the
1990's real estate downturn, some of which are still held.
The following table shows the Company's agricultural mortgage loan
portfolio by its three major sectors: agri-business, timber and production
agriculture.
As of September 30, 2003 As of December 31, 2002
------------------------------------------ -------------------------------------------
Amortized Carrying % of Total Amortized Carrying % of Total
Cost Value Carrying Value Cost Value Carrying Value
------------------------------------------ -------------------------------------------
(in millions) (in millions)
Agri-business.................. $1,718.2 $1,718.2 60.0% $1,526.8 $1,520.8 57.7%
Timber......................... 1,155.1 1,127.1 39.3 1,090.4 1,086.7 41.3
Production agriculture......... 20.0 20.0 0.7 25.3 25.1 1.0
------------------------------------------ -------------------------------------------
Total...................... $2,893.3 $2,865.3 100.0% $2,642.5 $2,632.6 100.0%
========================================== ===========================================
The following table shows the distribution of our mortgage loan portfolio
by property type as of the dates indicated. Our commercial mortgage loan
portfolio consists primarily of non-recourse fixed-rate mortgages on fully, or
nearly fully, leased commercial properties.
Mortgage Loans - By Property Type
As of September 30, 2003 As of December 31, 2002
----------------------------- --------------------------------
Carrying % of Carrying % of
Value Total Value Total
----------------------------- --------------------------------
(in millions) (in millions)
Apartment.......................... $ 1,353.6 12.7% $ 1,408.4 13.7%
Office Buildings................... 2,655.1 25.0 2,779.9 27.0
Retail............................. 1,941.2 18.3 1,779.3 17.3
Agricultural....................... 2,865.3 27.0 2,632.6 25.6
Industrial......................... 934.6 8.8 916.5 8.9
Hotels............................. 440.5 4.1 447.3 4.3
Multi-Family....................... 0.9 -- 1.4 --
Mixed Use.......................... 242.0 2.3 155.2 1.5
Other.............................. 192.5 1.8 175.9 1.7
----------------------------- --------------------------------
Total......................... $10,625.7 100.0 $10,296.5 100.0%
============================= ================================
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JOHN HANCOCK LIFE INSURANCE COMPANY
The following table shows the distribution of our mortgage loan portfolio
by geographical region, as defined by the American Council of Life Insurers
(ACLI).
Mortgage Loans -- By ACLI Region
----------------------------------------- --------------------------------
As of September 30, 2003 As of December 31, 2002
----------------------------------------- --------------------------------
Number Carrying % of Carrying % of
Of Loans Value Total Value Total
----------------------------------------- --------------------------------
(in millions) (in millions)
East North Central....... 192 $ 1,133.0 10.7% $ 1,102.0 10.7%
East South Central....... 74 430.4 4.1 430.5 4.2
Middle Atlantic.......... 157 1,606.4 15.1 1,447.4 14.1
Mountain................. 116 480.0 4.5 488.5 4.7
New England.............. 129 791.3 7.4 794.7 7.7
Pacific.................. 376 2,178.8 20.5 2,134.5 20.7
South Atlantic........... 290 2,361.0 22.2 2,229.5 21.7
West North Central....... 90 426.8 4.0 450.5 4.4
West South Central....... 181 920.0 8.7 952.2 9.2
Canada................... 13 298.0 2.8 266.7 2.6
----------------------------------------- --------------------------------
Total............... 1,618 $10,625.7 100.0% $10,296.5 100.0%
========================================= ================================
The following table shows the carrying values of our mortgage loan
portfolio that are delinquent but not in foreclosure, delinquent and in
foreclosure, restructured and foreclosed. The table also shows the respective
ratios of these items to the total carrying value of our mortgage loan
portfolio. Mortgage loans are classified as delinquent when they are 60 days or
more past due as to the payment of interest or principal. Mortgage loans are
classified as restructured when they are in good standing, but the basic terms,
such as interest rate or maturity date, have been modified as a result of a
prior actual delinquency or an imminent delinquency. All foreclosure decisions
are based on a thorough assessment of the property's quality and location and
market conditions. The decision may also reflect a plan to invest additional
capital in a property to make tenant improvements or renovations to secure a
higher resale value at a later date. Following foreclosure, we rely on our real
estate investment group's ability to manage foreclosed real estate for eventual
return to investment real estate status or outright sale. Mortgage Loan
Comparisons
As of September 30, As of December 31,
2003 2002
------------------------------------ -------------------------------------
Carrying % of Total Carrying % of Total
Value Mortgage Loans (1) Value Mortgage Loans (1)
------------------------------------ ------------------------------------
(in millions) (in millions)
Delinquent, not in foreclosure...... $ 14.4 0.1% $ 6.1 0.1%
Delinquent, in foreclosure.......... 54.0 0.5 44.4 0.4
Restructured........................ 62.9 0.6 54.8 0.5
Loans foreclosed during period...... 16.0 0.2 25.8 0.3
Other loans with valuation
allowance (2)................... 68.5 0.6 5.5 0.1
------------------------------------ ------------------------------------
Total............................ 215.8 2.0 136.6 1.4
------------------------------------ ------------------------------------
Valuation allowance................. $ 66.3 0.6% $ 61.7 0.6%
==================================== ====================================
(1) As of September 30, 2003 and December 31, 2002 the Company held mortgage
loans with a carrying value of $10.6 billion and $10.3 billion,
respectively.
(2) Increase as of September 30, 2003 is from a U.S. based forest products
company that filed for bankruptcy in June 2003.
Valuation allowance is maintained at a level that is adequate enough to
absorb estimated probable credit losses. Management's periodic evaluation of the
adequacy of the allowance for losses is based on past experience, known and
inherent risks, adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated value of the
underlying security, the general composition of the portfolio, current economic
conditions and other
71
JOHN HANCOCK LIFE INSURANCE COMPANY
factors. This evaluation is inherently subjective and is susceptible to
significant changes and no assurance can be given that the allowances taken will
in fact be adequate to cover all losses or that additional valuation allowances
or asset write-downs will not be required in the future. The valuation allowance
for the mortgage loan portfolio was $66.3 million, or 0.6% of the carrying value
of the portfolio as of September 30, 2003.
Investment Results
Net Investment Income. The following table summarizes the Company's investment
results for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------------------------------------------------------------------------------------
Yield Amount Yield Amount Yield Amount Yield Amount
------------------------------------------------------------------------------------------
(in millions) (in millions) (in millions) (in millions)
General account assets-excluding
Policy loans
Gross income...................... 5.81% $ 942.1 6.72% $ 905.6 6.13% $ 2,847.1 6.73% $ 2,727.7
Ending assets-excluding policy
loans (1)..................... 64,908.3 56,354.8 64,908.3 56,354.8
Policy loans
Gross income...................... 6.17% 31.0 6.26% 30.2 6.07% 91.9 6.13% 89.0
Ending assets..................... 2,012.5 1,937.1 2,012.5 1,937.1
Total gross income......... 5.82% 973.1 6.71% 935.8 6.13% 2,939.0 6.71% 2,816.7
Less: investment expenses.. (41.6) (57.4) (132.1) (161.8)
--------- --------- ---------- ---------
Net investment income ..... 5.57% $ 931.5 6.30% $ 878.4 5.86% $ 2,806.9 6.33% $ 2,654.9
========= ========= ========== =========
(1) Cash and cash equivalents are included in invested assets in the table
above for the purposes of calculating yields on income producing assets
for the Company.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Net investment income increased $53.1 million from the comparable prior
year period. The increase was primarily the result of asset growth and lower
investment expenses which were partially offset by the acquisition of lower
yielding assets. Overall, the yield for the three months ended September 30,
2003, net of investment expenses, on the general account portfolio decreased to
5.57% from 6.30% for the prior year. The lower portfolio yield was driven
primarily by lower yields on investment acquisitions. The continued drop in
short-term interest rates during the year, which affects the rate reset on
floating rate assets, also contributed to the declining yield. The change in
yields was impacted by the following drivers:
o As of September 30, 2003 and September 30, 2002, the Company's asset
portfolio had approximately $13 billion and $12 billion of
floating-rate exposure (primarily LIBOR). This exposure was created
mostly through interest rate swaps designed to match our
floating-rate liability portfolio. As of September 30, 2003,
approximately 90% of this floating rate exposure, excluding the
portion that is attributable to cash and short-term investments, was
directly offset by exposure to floating-rate liabilities. Most of
the remaining 10% of exposure is in floating rate assets acquired
for their relative value and is accounted for in the portfolio's
interest rate risk management plan. As a result of the drop in short
term rates over the year, as well as the increase in exposure, this
floating-rate exposure reduced the portfolio yield by 5 basis points
for the three month period ending September 30, 2003 compared to the
three month period ending September 30, 2002.
o Certain of our tax-preferenced investments (lease residual
management and affordable housing limited partnerships) dilute the
Company's net portfolio yield on a pre-tax basis. For the three
month period ended September 30, 2003, this dilutive effect was 10
basis points, compared to 16 basis points in the comparable prior
year period. Adjusting for taxes, net income on these investments
increased by $2.9 million for the three month period ended September
30, 2003 compared to the three month period ended September 30,
2002.
o The inflow of new cash for the three month period ending September
30, 2003 was invested at rates that were below the portfolio rate
for the prior year period. In addition, maturing assets rolling over
into new investments at rates less favorable than those available in
2002 also contributed to the decline in yields.
Offsetting the effects of these decreases to yields on investments was an
increase in invested assets and a reduction in investment expenses. In the three
month period ended September 30, 2003, average invested assets increased
$9,663.6 million, or 16.9%, from the prior year period. In addition, investment
expenses were reduced $15.8 million in the three month
72
JOHN HANCOCK LIFE INSURANCE COMPANY
period ended September 30, 2003 compared to the prior year. Included are
reductions in expenses associated with the sale of the Company's home office
real estate properties.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Net investment income increased $152.0 million from the comparable prior
year period. The increase was primarily the result of asset growth and lower
investment expenses which were partially offset by the acquisition of lower
yielding assets. Overall, the yield for the nine months ended September 30,
2003, net of investment expenses, on the general account portfolio decreased to
5.86% from 6.33% for the prior year. The lower portfolio yield was driven
primarily by lower yields on investment acquisitions. The continued drop in
short-term interest rates during the year, which affects the rate reset on
floating rate assets, also contributed to the declining yield. The change in
yields was impacted by the following drivers:
o As of September 30, 2003 and September 30, 2002, the Company's asset
portfolio had approximately $13 billion and $12 billion of
floating-rate exposure (primarily LIBOR). This exposure was created
mostly through interest rate swaps designed to match our
floating-rate liability portfolio. As of September 30, 2003,
approximately 90% of this floating rate exposure, excluding the
portion that is attributable to cash and short-term investments, was
directly offset by exposure to floating-rate liabilities. Most of
the remaining 10% of exposure is in floating rate assets acquired
for their relative value and is accounted for in the portfolio's
interest rate risk management plan. As a result of the drop in short
term rates over the year, as well as the increase in exposure, this
floating-rate exposure reduced the portfolio yield by 5 basis points
for the nine month period ending September 30, 2003 compared to the
nine month period ending September 30, 2002.
o Certain of our tax-preferenced investments (lease residual
management and affordable housing limited partnerships) dilute the
Company's net portfolio yield on a pre-tax basis. For the nine month
period ended September 30, 2003, this dilutive effect was 9 basis
points, compared to 12 basis points in the comparable prior year
period. However, adjusting for taxes, these investments increased
the Company's net income by $5.3 million for the nine month period
ended September 30, 2003 compared to the nine month period ended
September 30, 2002.
o The inflow of new cash for the nine month period ending September
30, 2003 was invested at rates that were below the portfolio rate
for the prior year period. In addition, maturing assets rolling over
into new investments at rates less favorable than those available in
2002 also contributed to the decline in yields.
Offsetting the effects of these decreases to yields on investments was an
increase in invested assets and a reduction in investment expenses. In the nine
month period ended September 30, 2003, average invested assets increased
$7,938.7 million, or 14.2%, from the prior year period. In addition, investment
expenses were reduced $29.7 million in the nine month period ended September 30,
2003 compared to the prior year. Included are reductions in expenses associated
with the sale of the Company's home office real estate properties.
73
JOHN HANCOCK LIFE INSURANCE COMPANY
Net Realized Investment and Other Gain/(Loss)
The following table shows the Company's net realized investment and other
gains (losses) by asset class for the periods presented:
Gross Gain Gross Loss Hedging Net Realized Investment
For the three months ended September 30, 2003 Impairment On Disposal on Disposal Adjustments and Other Gain/(Loss)
------------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) (2)....... $(70.7) $ 59.7 $(22.7) $(48.9) $(82.6)
Equity securities (3)................... (2.2) 18.0 (0.6) -- 15.2
Mortgage loans on real estate........... -- 33.3 (16.2) (13.8) 3.3
Real estate............................. -- 0.1 (2.2) -- (2.1)
Other invested assets................... -- 1.9 (1.4) -- 0.5
Derivatives............................. -- -- -- (32.4) (32.4)
------------------------------------------------------------------------------
Subtotal................. $(72.9) $113.0 $(43.1) $(95.1) $(98.1)
==============================================================================
Amortization adjustment for deferred policy acquisition costs...................... 5.7
Amounts credited to participating pension contractholders.......................... 7.1
Amounts credited to the policyholder dividend obligation........................... 22.6
------------------------
Total......................................................................... $(62.7)
========================
(1) Fixed maturities gain on disposals includes $14.5 million of gains from
previously impaired securities.
(2) Fixed maturities loss on disposals includes $0.3 million of credit related
losses.
(3) Equity securities gain on disposal includes $1.5 million of gains from
equity securities received as settlement compensation from an investor
whose securities had previously been impaired.
Gross Gain Gross Loss Hedging Net Realized Investment
For the nine months ended September 30, 2003 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss)
------------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) (2)....... $(383.3) $370.9 $ (65.5) $(203.2) $(281.1)
Equity securities (3)................... (27.5) 49.9 (2.5) -- 19.9
Mortgage loans on real estate........... -- 54.1 (28.1) (46.7) (20.7)
Real estate............................. -- 278.3 (5.0) -- 273.3
Other invested assets................... (10.3) 15.7 (7.4) -- (2.0)
Derivatives............................. -- -- -- 95.7 95.7
------------------------------------------------------------------------------
Subtotal................. $(421.1) $768.9 $(108.5) $(154.2) $ 85.1
==============================================================================
Amortization adjustment for deferred policy acquisition costs...................... (6.7)
Amounts charged to participating pension contractholders........................... 8.6
Amounts charged to the policyholder dividend obligation............................ 34.0
------------------------
Total......................................................................... $ 121.0
========================
(1) Fixed maturities gain on disposals includes $63.7 million of gains from
previously impaired securities.
(2) Fixed maturities loss on disposals includes $23.3 million of credit
related losses.
(3) Equity securities gain on disposal includes $1.5 million of gains from
equity securities received as settlement compensation from an investor
whose securities had previously been impaired.
The hedging adjustments in the fixed maturities and mortgage loans asset
classes are non-cash adjustments representing the amortization or reversal of
prior fair value adjustments on assets in those classes that were or are
designated as hedged items in fair value hedge. When an asset or liability is so
designated, its cost basis is adjusted in response to movement in interest rate.
These adjustments are non-cash and reverse with the passage of time as the asset
or liability and derivative mature. The hedging adjustments on the derivatives
represent non-cash adjustments on derivative instruments and on assets and
liabilities designated as hedged items reflecting the change in fair value of
those items.
For the three and nine month periods ended September 30, 2003 net realized
investment and other gains was a loss of $62.7 million and a gain of $121.0
million, respectively. For the same time periods, gross losses on impairments
and on disposal of investments - including bonds, equities, real estate,
mortgages and other invested assets was $116.0 million and $529.6 million,
respectively, excluding hedging adjustments.
For the three and nine month periods ended September 30, 2003, we realized
$59.7 million and $370.9 million of gains on disposal of fixed maturities
excluding hedging adjustments, respectively. These gains resulted from managing
our portfolios for tax optimization and ongoing portfolio positioning, as well
as $11.6 million and $55.8 million, respectively, of
74
JOHN HANCOCK LIFE INSURANCE COMPANY
prepayments and approximately $14.5 million and $63.7 million, respectively,
from recoveries on sales of previously impaired securities.
For the three and nine month periods ended September 30, 2003, we realized
$22.7 million and $65.5 million, respectively, of losses upon disposal of bonds
excluding hedging adjustments. We generally intend to hold securities in
unrealized loss positions until they mature or recover. However, we do sell
bonds under certain circumstances such as when new information causes us to
change our assessment of whether a bond will recover or perform according to its
contractual terms, in response to external events (such as a merger or a
downgrade) that result in investment guideline violations (such as single issuer
or overall portfolio credit quality limits), in response to extreme catastrophic
events (such as September 11, 2001) that result in industry or market wide
disruption, or to take advantage of tender offers. Sales generate both gains and
losses.
The Company has a process in place to identify securities that could
potentially have an impairment that is other than temporary. This process
involves monitoring market events that could impact issuers' credit ratings,
business climate, management changes, litigation and government actions, and
other similar factors. This process also involves monitoring late payments,
downgrades by rating agencies, key financial ratios, financial statements,
revenue forecasts and cash flow projections as indicators of credit issues.
At the end of each quarter, our Investment Review Committee reviews all
securities where market value is less than ninety percent of amortized cost for
three months or more to determine whether impairments need to be taken. This
committee includes the head of workouts, the head of each industry team, the
head of portfolio management, the Chief Investment Officer and the Corporate
Risk Officer who reports to the Chief Financial Officer. The analysis focuses on
each company's or project's ability to service its debts in a timely fashion and
the length of time the security has been trading below cost. The results of this
analysis are reviewed by both our external auditors and the Life Company's
Committee of Finance, a subcommittee of the Life Company's Board of Directors,
quarterly. This quarterly process includes a fresh assessment of the credit
quality of each investment in the entire fixed maturities portfolio.
The Company considers relevant facts and circumstances in evaluating
whether the impairment of a security is other than temporary. Relevant facts and
circumstances considered include (1) the length of time the fair value has been
below cost; (2) the financial position of the issuer, including the current and
future impact of any specific events; and (3) the Company's ability and intent
to hold the security to maturity or until it recovers in value. To the extent
the Company determines that a security is deemed to be other than temporarily
impaired, the difference between amortized cost and fair value would be charged
to earnings.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include (1) the risk that our
assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer, (2)
the risk that the economic outlook will be worse than expected or have more of
an impact on the issuer than anticipated, (3) fraudulent information could be
provided to our investment professionals who determine the fair value estimates
and other than temporary impairments, and (4) the risk that new information
obtained by us or changes in other facts and circumstances lead us to change our
intent to hold the security to maturity or until it recovers in value. Any of
these situations could result in a charge to earnings in a future period.
Impairments and Losses on Disposals - Three Months Ended September 30, 2003
As disclosed in our discussion of the Results of Operations in this MD&A,
the Company recorded losses due to other than temporary impairments of fixed
maturity securities for three month period ended September 30, 2003 of $73.6
million (including impairment losses of $70.7 million and $2.9 million of
previously recognized gains where the bond was part of a hedging relationship).
The following list shows the largest losses recognized during the quarter, the
related circumstances giving rise to the loss and a discussion of how those
circumstances impacted other material investments held. Unless noted otherwise,
all of the items shown are impairments of securities held at September 30, 2003,
including hedging adjustments.
o $26.4 million on private fixed maturity securities secured by
aircraft leased by a large U.S. airline operating in bankruptcy.
This airline is seeking to reduce its lease rates as a small part of
its larger efforts to reduce costs and emerge from bankruptcy. We
continue to actively negotiate with the entity and this impairment
is based on the expected reduction in the lease rates and observed
market prices in the 3rd quarter on public bonds.
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JOHN HANCOCK LIFE INSURANCE COMPANY
o $14.9 million on private fixed maturities of a holding company
structure created to develop three natural gas fired power projects
in the southwestern United States that were initiated to respond to
the California power crisis. The subsequent drop in power demand and
prices made this company's business plan uneconomic. Negotiations
with the company to restructure the debt into a stronger entity led
to an impairment in our security. We have one other $50 million loan
to a power company that similarly began construction on a new plant
to sell power into California. It has successfully redeployed its
turbines elsewhere and we do not expect a loss on that position.
o $13.2 million on private fixed maturity securities relating to an
Australian mining company. The company filed the equivalent of
Chapter 11 due to weaker commodity prices, operational difficulties,
and losses on currency transactions. Attempts to sell assets at
prices sufficient to pay our debt have not been successful. As a
result, the investment has been written off entirely. While lower
commodity prices affect a broad range of credits, the unique
circumstances of this company are not present in our other
investments.
o $7.2 million on public fixed maturity securities relating to an
asset backed pool of franchise loans primarily focused in the
gas/convenience store sector. The sector has continued to be hit
hard by higher delinquencies and lower recoveries on the underlying
loans. Higher delinquencies and lower recovery values led to
impairments on these securities. We have $142 million of other
exposure to franchise loan ABS, all of which are senior tranches,
and one other exposure requiring a $4 million impairment in the
third quarter.
Of the $22.7 million of realized losses on sales of fixed maturity
securities for the three months ended September 30, there were no significant
credit losses. Most of the sales were related to general portfolio management,
largely due to redeploying high quality, liquid public bonds into more permanent
investments and the losses resulted from increasing interest rates during the
quarter. The sales with losses in excess of $1.0 million were:
o $2.1 million on the sale of public bonds of a large U.S. based bank.
The loss was entirely due to a rise in Treasury rates since the time
of purchase.
o $5.3 million on the sale of U.S. agency debentures. The loss was
almost entirely due to a rise in Treasury rates sine the time of
purchase.
Impairments and Losses on Disposals - Nine Months Ended September 30, 2003
As disclosed in our discussion of the Results of Operations in this MD&A,
the Company recorded losses due to other than temporary impairments of fixed
maturity securities for the first nine months of 2003 of $404.7 million
(including impairment losses of $383.3 million, and $21.4 million of previously
recognized gains where the bond was part of a hedging relationship). The
following list shows the largest losses recognized year to date, the related
circumstances giving rise to the loss and a discussion of how those
circumstances impacted other material investments held. Unless noted otherwise,
all of the items shown are impairments of securities held at September 30, 2003,
including hedging adjustments.
o $37.6 million (including an impairment loss of $37.3 million and
$0.3 million in previously recognized gains where the bonds were
part of a hedging relationship) on public fixed maturity securities
relating to a large, national farmer-owned dairy co-operative.
Margins have been squeezed due to a supply/demand imbalance, high
input costs and high leverage, due in part to a recent acquisition.
Despite a large favorable outcome on a lawsuit, depressed commodity
prices in this environment have continued to put pressure on the
company to rationalize their operations as was evident in their
recently released annual financial statements. Given our
subordinated position in the capital structure, and unlikely
improvement near term, we have impaired the security to the market
level. We have no other loans to dairy companies that are impacted
by this same combination of factors. We have recovered $5.3 million
on subsequent sales of this security.
o $36.1 million on private and public fixed maturity securities
secured by aircraft leased by a large U.S. airline. This airline is
seeking to reduce its lease rates as a small part of its larger
efforts to reduce costs and emerge from bankruptcy. These
impairments are based on public quoted prices for the public
securities and the appraised values of the aircraft in conjunction
with the expected restructured lease rates on the private
securities. While we hold other investments in the aircraft
industry, these circumstances are unique to this issuer.
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JOHN HANCOCK LIFE INSURANCE COMPANY
o $27.3 million on public fixed maturity securities relating to a
large North American transportation provider to a variety of
industries that has struggled to emerge from bankruptcy due to
litigation with a subsidiary, tax claims by the IRS, and most
recently, a claim by a regulatory agency. We had further impaired
the security and the reorganization out of bankruptcy has occurred.
These circumstances are unique to this issuer. We have recovered
$26.4 million on subsequent sales of this security.
o $29.8 million on private fixed maturity securities relating to an
Australian mining company. The company filed the equivalent of a
Chapter 11 due to weaker commodity prices, operational difficulties,
and losses on currency transactions. Attempts to sell assets at
prices sufficient to pay our debt have not been successful. As a
result, the investment has been written off entirely. While lower
commodity prices affect a broad range of credits, the unique
circumstances of this company are not present in our other
investments.
o $26.3 million (including an impairment loss of $23.2 million and
$3.1 million in previously recognized gains where the bonds were
part of a hedging relationship) on public fixed maturity securities
relating to a special purpose company created to sublease aircraft
to two major US airlines. This investment is the subordinated
tranche in a multi-tier structure of an Enhanced Equipment Trust
Certificate (EETC). One of the airlines is in bankruptcy and has
indicated that it will not honor the original lease rates on the
aircraft in this investment. Hence, with the loan exceeding the
current value of the securities we have impaired the security to the
market level. While we do have an investment in the senior tranche
of this EETC, the senior tranche exposure is still less than the
current market value of the underlying planes and the senior tranche
enjoys an 18 month liquidity facility. Hence we do not anticipate a
loss on the senior tranche.
o $25.0 million on private fixed maturity securities (including an
impairment loss of $19.8 million and $5.2 million in previously
recognized gains where the bond was part of a hedging relationship)
on a toll road where a new competing road has decreased the traffic
on the toll road and hence the project has been unable to service
its debt. We have no other holdings affected by this situation.
o $22.9 million on private fixed maturities of a holding company
structure created to develop three natural gas fired power projects
in the southwestern United States that were initiated to respond to
the California power crisis. The subsequent drop in power demand and
prices made this company's business plan uneconomic. Negotiations
with the company to restructure the debt into a stronger entity led
to an impairment in our security. We have one other $50 million loan
to a power company that similarly began construction on a new plant
to sell power into California. It has successfully redeployed its
turbines elsewhere and we do not expect a loss on that position.
o $20.6 million (including an impairment loss of $18.2 million and
$2.4 million in previously recognized gains where the bond was part
of a hedging relationship) on public fixed maturity securities
relating to an asset backed pool of franchise loans primarily
focused in the gas/convenience store sector. The sector has
continued to be hit hard by higher delinquencies and lower
recoveries on the underlying loans. Higher delinquencies and lower
recovery values led to impairments on these securities. We have $142
million of other exposure to franchise loan ABS, all of which are
senior tranches, and one other exposure requiring a $4 million
impairment in the third quarter.
o $14.1 million on public fixed maturity securities relating to a
subordinated holding company structure comprised of ownership
interests in three power generation facilities in the western US.
Due to the severe overcapacity in the power markets and the lack of
an off take provider for the potential power generated from the
plants, this subordinated interest in the facilities was not
refinanced and hence we wrote off the investment completely. The
overcapacity in the power markets have put stress on all power
producers as we discuss in our sector commentary.
o $11.1 million on private fixed maturity securities on a Chilean
based conglomerate. Attempts to renegotiate the agreement have not
materialized and the likelihood of receiving any recovery is remote.
We have completely written off the investment. The circumstances
surrounding this investment are unique as the borrower has
demonstrated a lack of willingness to repay the debt of this
investment.
o $11.0 million on public fixed maturity securities (including an
impairment loss of $9.2 million and $1.8 million in previously
recognized gains where the bond was part of a hedging relationship)
of a utility brought into the bankruptcy of its parent that suffered
from a significant amount of merchant energy exposure. Our bonds are
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JOHN HANCOCK LIFE INSURANCE COMPANY
secured by a pump storage facility. We have $48.9 million carrying
value of bonds at the parent that were also impaired.
o $11.0 million on private fixed maturity securities secured by
aircraft leased by a large U.S. airline. This airline negotiated its
lease rates as a small part of its larger efforts to reduce costs to
avoid bankruptcy. This impairment is based on the reduction in the
lease rates. We have $57.8 million of other ETC's backed by leases
to this airline. The airline has not requested a change in the lease
rates on the aircraft backing these investments. While we hold other
investments in the airline industry and the industry has been under
extreme pressure as we discuss in our sector commentary, these
issues are unique to this borrower.
o $9.7 million on public fixed maturity securities relating to a
manufacturer of composite and building materials. This company has
struggled to emerge from bankruptcy due to numerous lawsuits and a
disagreement between the banks and noteholders. Hence the price of
these securities has declined and we are further impairing them down
to current market levels. These circumstances are unique to this
issuer.
o $9.6 million on public fixed maturity securities relating to an
unregulated power and pipeline energy company that became insolvent
due to a fall in profitability in its merchant energy business
downgrades from the rating agencies and a lack of liquidity due to
the call on cash collateral requirements after the downgrades. We
have impaired the security to market levels. The overcapacity in the
power markets have put stress on all power producers as we discuss
in our sector commentary.
o $9.4 million on public fixed maturity securities relating to a
special purpose financing company which owns an interest in a gas
fired power plant in the UK with long-term fixed price contracts
that are significantly above market in today's depressed pricing
environment. In early 2003, the banks decided to pursue a fire sale
of the power plant. We have impaired this loan to the discounted
value of our likely recovery from such a sale. We have two other
loans with a total carrying value of $99.6 million to companies
participating in the UK power market. $59.3 million is backed by a
UK pump storage facility investment where debt service coverage has
been reduced by the weak environment for power in the U.K., but we
continue to anticipate positive debt service coverage for this
investment. $40.3 million is a loan to the owner of a UK regional
electric company. Regional electric companies have monopolies to
distribute and supply power to their regions thus are less affected
by the over supply of power.
Of the $65.5 million of realized losses on sales of fixed maturity
securities for the nine months ended September 30, 2003, $23.3 million was
credit related and $41.5 million arose from the sale of 9 securities with $1.0
million or more of realized loss. The only significant realized losses year to
date were $16.7 million on the sale of the bonds of a major healthcare service
provider (late in the first quarter, the SEC announced that they had discovered
massive accounting fraud at that company and thus its bond and stock prices
plummeted; due to this significant event and the uncertainty over the future of
the company due to the ongoing SEC investigation, we sold our position), and
$4.9 million on the sale of bonds of a power provider with a large exposure to
the merchant energy markets. As we became more concerned that the banks would
not renew their bank lines to this company, we sold most of our position and
impaired the remaining position that was subsequently sold in early July. These
were the only sales of significance that we consider credit losses, i.e. sold at
less than 80% of amortized cost. All other sales were related to general
portfolio management, including the sale of a number of below investment grade
bonds to maintain our exposure below 10% of invested assets on a statutory
basis. The following are the losses on sales over $1.0 million:
o $16.7 million credit loss on the sale of public bonds of a major
healthcare service provider as referred to in above paragraph.
o $6.0 million on the sale of U.S. agency debentures. The loss was
almost entirely due to a rise in Treasury rates since the time of
purchase.
o $4.9 million credit loss on the sale of public bonds of a power
provider referred to in the above paragraph.
o $3.3 million on the sale of public bonds of a utility holding
company where our position exceeded our single credit limits due to
a downgrade of the company. This sale brought our holdings of this
company in compliance within our limits.
o $3.1 million on the sale of public bonds of an oil & gas company's
bonds by one of subsidiary managers. This manager sold this position
to reduce its below investment grade exposure.
o $2.2 million on the sale of public bonds of an oil & gas pipeline
company in order to maintain our below investment
78
JOHN HANCOCK LIFE INSURANCE COMPANY
grade holdings below 10% of invested assets on a Statutory basis.
o $2.1 million on the sale of public bonds of a large U.S. based bank.
The loss was entirely due to a rise in Treasury rates since the time
of purchase.
o $2.1 million on the sale of public bonds of an unregulated power
generating company. This bond was sold after a downgrade created a
credit limit violation.
o $1.1 million on the sale of public bonds of another power provider
with a significant exposure to the merchant energy markets and our
concern over their ability to renew their bank lines.
There were no other sales with losses more than $1 million and no other
sales of bonds at less than 80% of amortized cost, which we would consider as
credit losses. These sales helped reduce our below investment grade holdings and
accomplished other portfolio objectives.
The Company recorded losses due to other than temporary impairments of CDO
equity and other invested assets of $10.3 million for the nine month periods
ended September 30, 2003, no such losses were incurred in the quarter. Equity in
these CDO's take the first loss risk in a pool of high yield debt and hence
under perform in a high yield default environment. We have a total remaining
carrying value of $45.1 million and $48.7 million of CDO equity as September 30,
2003 and December 31, 2002, which is currently supported by expected cash flows.
The Company also recognized losses on other than temporary impairments of
common stock of $2.2 million and $27.5 million for the three and nine month
periods ended September 30, 2003, respectively, as the result of market values
falling below cost for more than six months.
The Company recorded a gain of $3.3 million and a loss of $20.7 million on
mortgage loans for the three and nine month periods ended September 30, 2003 (of
which $13.8 million and $46.7 million, respectively were losses on hedging
adjustments). Included are losses of $7.7 million and $25.6 million respectively
for the three and nine months ended September 30, 2003, associated with losses
on agriculture mortgages.
There were also gains of $18.0 million and $49.9 million on the sale of
equity securities as part of our overall investment strategy of using equity
gains to minimize credit losses in the long term, gains of $1.9 million and
$15.7 million from the sale of other invested assets, and gains of $0.1 million
and $278.3 million resulting from the sale of real estate for the three and nine
month periods ended September 30, 2003, respectively. Net derivative activity
resulted in a loss of $32.4 million for the three months ended September 30,
2003 and a gain of $95.7 million for the nine months ended September 30, 2003,
resulting from a slightly larger impact from interest rate changes on the
Company's fair value of hedged and non-hedged items in comparison to the changes
in fair value of its derivatives.
For the three and nine month period ended September 30, 2002, net realized
investment and other losses were $37.9 million and $249.4 million, respectively.
Gross losses on impairments and on disposal of investments - including bonds,
equities, mortgages, real estate, and other invested assets were $168.0 million
and $544.3 million, respectively, excluding hedging adjustments.
The Company recorded losses due to other than temporary impairments of
fixed maturities of $103.9 million and $344.0 million for the three and nine
months periods ended September 30, 2002, excluding hedging adjustments. The
primary other than temporary impairments on fixed maturities for the nine months
ended September 30, 2002 were $45.5 million on securities issued by the holding
company of a large domestic power producer that was downgraded to below
investment grade status in July 2002 due to liquidity concerns, $18.4 million on
securities of an Australian power project that failed to produce benefits
expected from the deregulation of that country's power industry, $53.2 million
on structured financings due as a result of ongoing negotiations with a borrower
to restructure debt, $20.0 million on a redeemable preferred stock of a large
domestic farm cooperative due to the cyclical nature of the business and a heavy
debt load, $19.2 million on redeemable preferred stock of a technology based
manufacturer of engineering products with a tight liquidity position, and $55.6
million on a large energy company that filed for bankruptcy in late 2001.
Writedowns of CBO/CDO fixed maturity investments and other invested assets were
$57.1 million for the nine month period ended September 30, 2002.
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JOHN HANCOCK LIFE INSURANCE COMPANY
Liquidity & Capital Resources
Liquidity describes the ability of a company to generate sufficient cash
flows to meet the immediate capital needs to facilitate business operations. The
assets of the Company consist of a diversified investment portfolio and
investments in operating subsidiaries. The Company's cash flow consists
primarily of premiums, deposits, investment income, results of its operating
subsidiaries and proceeds from the Company's debt offerings offset by benefits
paid to contractholders, operating expenses, policyholder dividends to its
participating policyholders and shareholder dividends to it parent company. All
of the outstanding common stock of John Hancock Life Insurance Company is owned
by its Parent, an insurance holding company, John Hancock Financial Services,
Inc.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of prescribed limitations without prior
approval. The Company's limit is the greater of 10% of the statutory surplus at
prior year-end or the prior calendar year's statutory net gain from operations
of the Company. The ability of the Company to pay shareholder dividends is and
will continue to be subject to restrictions set forth in the insurance laws and
regulations of Massachusetts, it domiciliary state. The Massachusetts insurance
law limits how and when the Company can pay shareholder dividends. The Company,
in the future could also be viewed as being commercially domiciled in New York.
If so, dividend payments may also be subject to New York's holding company act
as well as Massachusetts' law. The Company currently does not expect such
regulatory requirements to impair its ability to meet its liquidity and capital
needs. During the first nine months of 2003, the Company paid $114.5 million in
dividends to its parent, John Hancock Financial Services, Inc.
Sources of cash for the Company include premiums, deposits and charges on
policies and contracts, investment income, maturing investments, and proceeds
from sales of investment assets. In addition to the need for cash flow to meet
operating expenses, our liquidity requirements relate principally to the
liabilities associated with various life insurance, annuity, and structured
investment products, and to the funding of investments in new products,
processes, and technologies. Product liabilities include the payment of benefits
under life insurance, annuity and structured investment products and the payment
of policy surrenders, withdrawals and policy loans. The Company periodically
adjusts its investment policy to respond to changes in short-term and long-term
cash requirements and provide adequate funds to pay benefits without forced
sales of investments.
As noted above on September 28, 2003, JHFS entered into a definitive
merger agreement with Manulife. Until the closing of the transaction, the
Company will continue to operate independently and does not expect the proposed
merger to have a negative impact on financial condition, liquidity or sales.
Following the announcement of the proposed merger, Standard and Poor's, Moody's,
A.M. Best and Finch affirmed all ratings. In addition Standard and Poor's noted
that "the 'A' long-term counterparty credit and senior debt ratings on John
Hancock Financial Services, Inc., a holding company for its U.S. and Canadian
operating insurance companies, have been placed on Credit Watch with positive
implications." Dominion Bond Rating Service placed John Hancock Financial
Services' corporate rating on A (high) and Maritime Life's long term ratings
"Under Review-Positive." And Maritime Life's financial strength ratings were
placed on "Credit Watch Positive" by Moody's and A.M. Best.
The liquidity of our insurance operations is also related to the overall
quality of our investments. As of September 30, 2003, $43,092.2 million, or
88.2% of the fixed maturity securities held by us and rated by Standard & Poor's
Ratings Services, a division of the McGraw-Hill Companies, Inc. (S&P) or the
National Association of Insurance Commissioners (NAIC) were rated investment
grade (BBB or higher by S&P or 1 or 2 by the National Association of Insurance
Commissioners). The remaining $5,743.1 million, or 11.8%, of fixed maturity
investments were rated non-investment grade. For additional discussion of our
investment portfolio see the General Account Investments section in this
Management's Discussion and Analysis of Financial Condition and Results of
Segment Operations.
We employ an asset/liability management approach tailored to the specific
requirements of each of our product lines. Each product line has an investment
strategy based on the specific characteristics of the liabilities in the product
line. As part of this approach, we develop investment policies and operating
guidelines for each portfolio based upon the return objectives, risk tolerance,
liquidity, and tax and regulatory requirements of the underlying products and
business segments.
Net cash provided by operating activities was $1,429.4 million and
$1,712.2 million for the nine month period ended September 30, 2003 and 2002,
respectively. Cash flows from operating activities are affected by the timing of
premiums received, fees received and investment income. The $291.8 million
decrease in the nine month period ended September 30, 2003 compared to 2002
resulted primarily from increased policyholder payments and operating expenses.
Net cash used in investing activities was $3,384.5 million compared to
$4,739.6 million for the nine month period ended September 30, 2003 and 2002,
respectively. Changes in the cash provided by investing activities primarily
relate to the management of the Company's investment portfolios and the
investment of excess capital generated by operating and financing activities.
The $1,355.1 million decrease in cash used in the nine month period ended
September 30, 2003 as compared to 2002 is primarily due to the sale of the Home
Office properties and net acquisitions of fixed maturities.
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JOHN HANCOCK LIFE INSURANCE COMPANY
Net cash provided by financing activities was $2,375.0 million and
$2,701.4 million for the nine month period ended September 30, 2003 and 2002,
respectively. The $326.4 million decrease in net cash provided by financing
activities for the nine month period ended September 30, 2003 as compared to
2002 was driven by a decrease in deposits and an increase in cash payments made
on withdrawals of universal life insurance and investment-type contracts
somewhat offset by a $769.4 million increase in funds from the issuance of
consumer notes, a program initiated in the second half of 2002. Deposits on such
universal life insurance and investment-type contracts exceeded withdrawals by
$1,690.2 million and $2,855.6 million for the nine months ended September 30,
2003 and 2002, respectively.
Cash flow requirements also are supported by a committed line of credit of
$1.0 billion, through a syndication of banks including Fleet National Bank,
JPMorgan Chase, Citicorp USA, Inc., The Bank of Nova Scotia, Fleet Securities,
Inc., and J.P. Morgan Securities Inc. The line of credit agreement provides for
two facilities: one for $500 million pursuant to a 364-day commitment (renewed
effective July 25, 2003) and a second for $500 million (renewable in 2005). The
line of credit is available for general corporate purposes. The line of credit
agreement contains various covenants, among these being that statutory total
capital and surplus plus asset valuation reserve meet certain requirements. To
date, we have not borrowed any amounts under the line of credit.
As of September 30, 2003, we had $500.3 million of principal amounts of
debt outstanding consisting of $447.5 million of surplus notes and $52.8 million
of other notes payable (excluding $212.1 million in non-recourse debt for
Signature Fruit and a Signature Funding CDO). Also not included here is the
$108.2 million SFAS No. 133 fair value adjustment to interest rate swaps held
for the Surplus Notes. A commercial paper program has been established at John
Hancock Financial Services, Inc., the Company's parent, that has replaced the
commercial paper program that was in place at John Hancock Capital Corporation,
the Company's subsidiary. As of May 1, 2002, all commercial paper issued by John
Hancock Capital Corporation had been retired.
The risk-based capital standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish a
risk-based capital ratio comparing adjusted surplus to required surplus for the
Company and each of our United States domiciled insurance subsidiaries. If the
risk-based capital ratio falls outside of acceptable ranges, regulatory action
may be taken ranging from increased information requirements to mandatory
control by the domiciliary insurance department. The risk-based capital ratios
are reported annually and monitored continuously. The Company's the risk-based
capital ratios of all our insurance subsidiaries as of year end were
significantly above the ranges that would require regulatory action.
The following table summarizes the Company's information about contractual
obligations by due date and expiration date as of September 30, 2003.
Contractual obligations of the Company are those obligations fixed by agreement
as to dollar amount and date of payment. These obligations are inputs into the
Company's asset liability management system described elsewhere in this
document. Other commercial commitments are those commitments entered into by the
Company with known expiration dates. No such other commercial commitments
existed at September 30, 2003.
Contractual Obligations as of September 30, 2003
Payments due by period
-----------------------------------------------------------------------
Less than 1
Total year 1-3 years 4-5 years After 5 years
-----------------------------------------------------------------------
(in millions)
Debt............................................... $ 500.3 $ 451.2 $ 34.7 $ 5.0 $ 9.4
Consumer notes..................................... 2,055.9 10.3 149.9 241.4 1,654.3
GIC's.............................................. 6,077.1 496.3 2,720.5 1,216.8 1,643.5
Funding agreements................................. 14,253.5 400.4 4,983.0 3,897.3 4,972.8
Institutional structured settlements............... 1,814.0 7.0 38.2 40.0 1,728.8
Annuity certain contracts.......................... 1,322.8 119.4 429.8 220.0 553.6
Investment commitments............................. 2,065.0 2,065.0 -- -- --
Operating lease obligations........................ 851.6 31.9 181.3 165.7 472.7
Other long-term obligations 256.4 25.7 92.9 81.1 56.7
-----------------------------------------------------------------------
Total contractual obligations................. $ 29,196.6 $ 3,607.2 $ 8,630.3 $ 5,867.3 $ 11,091.8
=======================================================================
We maintain reinsurance programs designed to protect against large or
unusual losses. Based on our review of our reinsurers' financial statements and
reputations in the reinsurance marketplace, we believe that our reinsurers are
financially sound, and, therefore, that we have no significant exposure to
uncollectible reinsurance in excess of uncollectible amounts already recognized
in our unaudited consolidated financial statements.
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JOHN HANCOCK LIFE INSURANCE COMPANY
Given the historical cash flow of our subsidiaries and current financial
results, management believes that the cash flow from the operating activities
over the next year will provide sufficient liquidity for our operations, as well
as to satisfy debt service obligations and to pay other operating expenses.
Although we anticipate that we will be able to meet our cash requirements, we
can give no assurances in this regard.
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JOHN HANCOCK LIFE INSURANCE COMPANY
Forward-Looking Statements
The statements, analyses, and other information contained herein relating
to trends in the John Hancock Life Insurance Company's (the Company's)
operations and financial results, the markets for the Company's products, the
future development of the Company's business, and the contingencies and
uncertainties to which the Company may be subject, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend," "will," "should," "may," and other similar expressions, are
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. Such statements are made based upon management's current expectations
and beliefs concerning future events and their effects on the Company. Future
events and their potential effects on the Company, may not be those anticipated
by management. The Company's actual results may differ materially from the
results anticipated in these forward-looking statements.
These forward-looking statements are subject to risks and uncertainties
including, but not limited to, the risks that (1) a significant downgrade in our
ratings for claims-paying ability and financial strength may lead to policy and
contract withdrawals and materially harm our ability to market our products; (2)
new laws and regulations, including the recently enacted Sarbanes-Oxley Act of
2002, or changes to existing laws or regulations, (including, but not limited
to, those relating to the Federal Estate Tax Laws and the proposed Bush
Administration tax and savings initiatives), and the applications and
interpretations given to these laws and regulations, may adversely affect the
Company's sales of insurance and investment advisory products; (3) Massachusetts
insurance law may restrict the ability of John Hancock Variable Life Insurance
Company to pay dividends to us; (4) we face increasing competition in our retail
businesses from mutual fund companies, banks and investment management firms as
well as from other insurance companies; (5) declines or increased volatility in
the securities markets, and other economic factors, may adversely affect our
business, particularly our variable life insurance, mutual fund, variable
annuity and investment business; (6) due to acts of terrorism or other
hostilities, there could be business disruption, economic contraction, increased
mortality, morbidity and liability risks, generally, or investment losses that
could adversely affect our business; (7) our life insurance sales are highly
dependent on a third party distribution relationship; (8) customers may not be
responsive to new or existing products or distribution channels; (9) interest
rate volatility may adversely affect our profitability; (10) our net income and
revenues will suffer if customers surrender annuities and variable and universal
life insurance policies or redeem shares of our open-end mutual funds; (11) the
independent directors of our variable series trusts and of our mutual funds
could reduce the compensation paid to us or could terminate our contracts to
manage the funds; (12) under our Plan of Reorganization, we were required to
establish the closed block, a special arrangement for the benefit of a group of
our policyholders. We may have to fund deficiencies in our closed block, and any
over-funding of the closed block will benefit only the holders of policies
included in the closed block, not our sole shareholder; (13) we will face losses
if the claims on our insurance products, or reductions in rates of mortality on
our annuity products, are greater than we projected; (14) we face investment and
credit losses relating to our investment portfolio, including, without
limitation, the risk associated with the evaluation and determination by our
investment professionals of the fair values of investments as well as whether or
not any investments have been impaired on an other than temporary basis; (15) we
may experience volatility in net income due to changes in standards of
accounting for derivatives, consolidations and other changes or from new
interpretations of accounting standards that must be applied retroactively; (16)
we are subject to risk-based capital requirements and possible guaranty fund
assessments; (17) the National Association of Insurance Commissioners'
codification of statutory accounting practices will adversely affect our
statutory surplus; (18) future interpretations of NAIC Actuarial Guidelines may
require us to establish additional statutory reserves for guaranteed minimum
death benefits under variable annuity contracts; (19) we may be unable to retain
personnel who are key to our business; (20) we may incur losses from assumed
reinsurance business in respect of personal accident insurance and the
occupational accident component of workers compensation insurance; (21)
litigation and regulatory proceedings may result in financial losses, harm our
reputation and divert management resources; (22) we face unforeseen liabilities
arising from our acquisitions and dispositions of businesses; (23) we face
unforeseen liabilities arising from our acquisitions and dispositions of
businesses and (24) we may incur multiple life insurance claims as a result of a
catastrophic event which, because of higher deductibles and lower limits under
our reinsurance arrangements, could adversely affect the Company's future net
income and financial position.
Readers are also directed to other risks and uncertainties discussed, as
well as to further discussion of the risks described above, in other documents
that may be filed by the Company with the United States Securities and Exchange
Commission from time to time. The Company specifically disclaims any obligation
to update or revise any forward-looking information, whether as a result of new
information, future developments, or otherwise.
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JOHN HANCOCK LIFE INSURANCE COMPANY
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Capital Markets Risk Management
The Company maintains a disciplined, comprehensive approach to managing
capital market risks inherent in its business and investment operations.
To mitigate capital market risks, and effectively support Company
objectives, investment operations are organized and staffed to focus investment
management expertise on specific classes of investments, with particular
emphasis placed on private placement markets. In addition, a dedicated unit of
asset/liability risk management (ALM) professionals centralizes the Life
Insurance Company's and its U.S. Life Insurance subsidiaries' implementation of
the interest rate risk management program. As an integral component of its ALM
program, derivative instruments are used in accordance with risk reduction
techniques established through Company policy and with formal approval granted
from the New York Insurance Department. The Company's use of derivative
instruments is monitored on a regular basis by the Company's Investment
Compliance Department and reviewed quarterly with senior management and the
Committee of Finance of the Company's wholly-owned subsidiary, John Hancock Life
Insurance Company, (the Company's Committee of Finance).
The Company's principal capital market exposures are credit and interest
rate risk, which includes the impact of inflation, although we have certain
exposures to changes in equity prices and foreign currency exchange rates.
Credit risk pertains to the uncertainty associated with the ability of an
obligor or counterparty to continue to make timely and complete payments of
contractual principal and interest. Interest rate risk pertains to the change in
fair value that occurs within fixed maturity securities or liabilities as market
interest rates move. Equity and foreign currency risk pertain to price
fluctuations, associated with the Company's ownership of equity investments or
non-US dollar denominated investments and liabilities, driven by dynamic market
environments.
Credit Risk
The Company manages the credit risk inherent in its fixed maturity
securities by applying strict credit and underwriting standards, with specific
limits regarding the proportion of permissible below-investment-grade holdings.
We also diversify our fixed maturity securities with respect to investment
quality, issuer, industry, geographical, and property-type concentrations. Where
possible, consideration of external measures of creditworthiness, such as
ratings assigned by nationally recognized rating agencies such as Moody's and
Standard & Poor's, supplement our internal credit analysis. The Company uses
simulation models to examine the probability distribution of credit losses to
ensure that it can readily withstand feasible adverse scenarios. In addition,
the Company periodically examines, on various levels of aggregation, its actual
default loss experience on significant asset classes to determine if the losses
are consistent with the (1) levels assumed in product pricing, and (2) rating
agencies' quality-specific cohort default data. These tests have generally found
the Company's aggregate experience to be favorable relative to the external
benchmarks and consistent with priced-for-levels.
The Company has a process in place that attempts to identify securities
that could potentially have an impairment that is other than temporary. This
process involves monitoring market events that could impact issuers' credit
ratings, business climate, management changes, acquisition, litigation and
government actions, and other similar factors. This process also involves
monitoring late payments, downgrades by rating agencies, key financial ratios,
financial statements, revenue forecasts and cash flow projections as indicators
of credit issues.
At the end of each quarter, our Investment Review Committee reviews all
securities where market value is less than ninety percent of amortized cost for
three months or more to determine whether impairments need to be taken. This
committee includes the head of workouts, the head of each industry team, and the
head of portfolio management, the Chief Investment Officer, and the Corporate
Risk Officer who reports to the Chief Financial Officer. The analysis focuses on
each company's or project's ability to service its debts in a timely fashion and
the length of time the security has been trading below cost. The results of the
analysis are reviewed by the Life Company's Committee of Finance, a subcommittee
of the Life Company's Board of Directors, quarterly. To supplement this process,
a quarterly review is made of the entire fixed maturity portfolio to assess
credit quality, including a review of all impairments with the Life Company's
Committee of Finance.
The Company considers and documents relevant facts and circumstances in
evaluating whether the impairment of a security is other than temporary.
Relevant facts and circumstances considered include (1) the length of time the
fair value has
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JOHN HANCOCK LIFE INSURANCE COMPANY
been below cost; (2) the financial position of the issuer, including the current
and future impact of any specific events; and (3) the Company's ability and
intent to hold the security to maturity or until it recovers in value. To the
extent the Company determines that a security is deemed to be other than
temporarily impaired the difference between amortized cost and fair value would
be charged to earnings.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include (1) the risk that our
assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer, (2)
the risk that the economic outlook will be worse than expected or have more of
an impact on the issuer than anticipated, (3) fraudulent information could be
provided to our investment professionals who determine the fair value estimates
and other than temporary impairments and (4) the risk that new information
obtained by us or changes in other facts and circumstances lead us to change our
intent to hold the security to maturity or until it recovers in value.
Any of these situations could result in a charge to earnings in a future
period to the extent of the impairment charge recorded. Because the majority of
our portfolio is classified as available-for-sale and held at fair value with
the related unrealized gains (losses) recorded in shareholders' equity, the
charge to earnings should not have a significant impact on shareholders' equity.
As of September 30, 2003 and December 31, 2002, 88.2% and 88.0% of the
fixed maturity securities held by the Company and rated by S&P or NAIC were
investment grade while 11.8% and 12.0% were below investment grade securities,
respectively. These percentages are consistent with recent experience and
indicative of the Company's long-standing investment philosophy of pursuing
moderate amounts of credit risk in return for higher expected returns. We
believe that credit risk can be successfully managed given our proprietary
credit evaluation models and experienced personnel.
Interest Rate Risk
The Company maintains a tightly controlled approach to managing its
potential interest rate risk. Interest rate risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets to
support the issuance of our various interest-sensitive liabilities, primarily
within our Protection, Asset Gathering and Guaranteed and Structured Financial
Products Segments.
We manage interest rate sensitive segments of our business, and their
supporting investments, under one of two broadly defined risk management methods
designed to provide an appropriate matching of assets and liabilities. For
guaranteed rate products, where contractual liability cash flows are highly
predictable (e.g., GICs or immediate annuities) we apply sophisticated
duration-matching techniques to manage the segment's exposure to both parallel
and non-parallel yield curve movements. Typically this approach involves a
targeted duration mismatch of zero, with an operational tolerance of less than
+/- 18 days, with other techniques used for limiting exposure to non-parallel
risk. Duration measures the sensitivity of the fair value of assets and
liabilities to changes in interest rates. For example, should interest rates
increase by 100 basis points, the fair value of an asset with a 5-year duration
is expected to decrease in value by approximately 5.0%. For non-guaranteed rate
products we apply scenario-modeling techniques to develop investment policies
with what we believe to be the optimal risk/return tradeoff given our risk
constraints. Each scenario is based on near term reasonably possible
hypothetical changes in interest rates that illustrate the potential impact of
such events.
We project asset, liability and derivatives cash flows on guaranteed rate
products and then discount them against credit-specific interest rate curves to
attain fair values. Duration is then calculated by re-pricing these cash flows
against a modified or "shocked" interest rate curve and evaluating the change in
fair value versus the base case. As of September 30, 2003 and December 31, 2002,
the fair value of fixed maturity securities and mortgage loans supporting
duration managed liabilities was approximately $33,460.8 million and $31,645.9
million, respectively. Based on the information and assumptions we use in our
duration calculations in effect as of September 30, 2003, we estimate that a 100
basis point immediate, parallel increase in interest rates ("rate shock") would
have no effect on the net fair value, or surplus, of our duration managed
segments (including derivatives), based on our targeted mismatch of zero, but
could be -/+ $16.7 million based on our operational tolerance of 18 days.
The risk management method for non-guaranteed rate products, such as whole
life insurance or single premium deferred annuities, is less formulaic, but more
complex, due to the less predictable nature of the liability cash flows. For
these
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JOHN HANCOCK LIFE INSURANCE COMPANY
products, we manage interest rate risk based on scenario-based portfolio
modeling that seeks to identify the most appropriate investment strategy given
probable policyholder behavior and liability crediting needs under a wide range
of interest rate environments. As of September 30, 2003 and December 31, 2002,
the fair value of fixed maturity securities and mortgage loans supporting
liabilities managed under this modeling was approximately $31,136.0 million and
$28,003.8 million, respectively. A rate shock (as defined above) as of September
30, 2003 would decrease the fair value of these assets by $1,239.7 million,
which we estimate would be offset by a comparable change in the fair value of
the associated liabilities, thus minimizing the impact on surplus.
Derivative instruments such as futures contracts and interest rate swaps
are used to hedge interest rate risk in our asset and liability portfolios, in
support of our duration management programs. Under both interest rate risk
management methods described above, we perform comprehensive quarterly
assessments of interest rate risk and compare those results to our investment
guidelines. Any deviations outside of operational tolerances are immediately
correct using derivative instruments. Additionally, we monitor duration mismatch
on an effective "real time" basis and apply derivatives as needed to eliminate
deviations from our target duration mismatches.
Derivative Instruments
The Company uses a variety of derivative financial instruments, including
swaps, caps, floors, and exchange traded futures contracts, in accordance with
Company investment policy. Permissible derivative applications include the
reduction of economic risk (i.e., hedging) related to changes in yields, prices,
cash flows, and currency exchange rates. In addition, certain limited
applications of income generation are allowed. Examples of this type of use
include the purchase of call options to offset the sale of embedded options in
Company liability issuance or the purchase of swaptions to offset the purchase
of embedded put options in certain investments. The Company does not make a
market or trade derivatives for speculative purposes.
As of January 1, 2001, the Company adopted SFAS No. 133, which became
effective for all companies reporting under GAAP in the United States. Briefly
stated, SFAS No. 133 requires that all derivative instruments must be recorded
as either assets or liabilities on the Company's balance sheet, with quarterly
recognition thereafter of changes in derivative fair values through its income
statement. The income effect of derivatives that meet all requirements of a
"qualified hedge" under SFAS No. 133 guidance may be offset, in part or in its
entirety, by recognition of changes in fair value on specifically identified
underlying hedged-items. These hedged-items must be identified at the inception
of the hedge and may consist of assets, liabilities, firm commitments or
forecasted transactions. Depending upon the designated form of the hedge (i.e.,
fair value or cash flow), changes in fair value must either be recorded
immediately through income or through shareholders' equity (other comprehensive
income) for subsequent amortization into income.
The Company's Investment Compliance Unit monitors all derivatives activity
for consistency with internal policies and guidelines. All derivatives trading
activity is reported monthly to the Company's Committee of Finance for review,
with a comprehensive governance report provided jointly each quarter by the
Company's Derivatives Supervisory Officer and Chief Investment Compliance
Officer. The table below reflects the Company's derivative positions hedging
interest rate risk as of September 30, 2003. The notional amounts in the table
represent the basis on which pay or receive amounts are calculated and are not
reflective of credit risk. These fair value exposures represent only a point in
time and will be subject to change as a result of ongoing portfolio and risk
management activities.
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JOHN HANCOCK LIFE INSURANCE COMPANY
As of September 30, 2003
----------------------------------------------------------------------------------------
Fair Value
-----------------------------------------------------
Weighted
Notional Average Term -100 Basis Point As of +100 Basis Point
Amount (Years) Change (2) 9/30/03 Change (2)
----------------------------------------------------------------------------------------
(in millions, except for weighted average term)
Interest rate swaps............... $27,899.2 12.4 $(180.8) $(544.0) $(788.1)
CMT swaps......................... 33.4 1.1 1.0 (1.0) 1.0
Futures contracts (1)............. 243.2 7.3 6.9 (1.7) (11.0)
Interest rate caps................ 828.9 5.5 20.4 26.6 38.9
Interest rate floors.............. 4,107.6 6.6 149.2 76.5 36.1
Swaptions......................... 30.0 21.7 (7.2) (3.0) (0.8)
------------------ -----------------------------------------------------
Totals......................... $33,142.3 $ (10.5) $(444.8) $(723.9)
================== =====================================================
(1) Represents the notional value on open contracts as of September 30, 2003.
(2) The selection of a 100 basis point immediate change in interest rates
should not be construed as a prediction by us of future market events but
rather as an illustration of the potential impact of such an event.
Our non-exchange-traded derivatives are exposed to the possibility of loss
from a counterparty failing to perform its obligations under terms of the
derivative contract. We believe the risk of incurring losses due to
nonperformance by our counterparties is remote. To manage this risk, Company
procedures include (a) the on-going evaluation of each counterparty's credit
ratings, (b) the application of credit limits and monitoring procedures based on
an internally developed, scenario-based risk assessment system, (c) quarterly
reporting of each counterparty's "potential exposure", (d) master netting
agreements, and (e) the use of collateral agreements. Futures contracts trade on
organized exchanges and have effectively no credit risk.
Equity Risk
Equity risk is the possibility that we will incur economic losses due to
adverse changes in a particular common stock or warrant that we hold in our
portfolio. In order to reduce our exposure to market fluctuations on some of our
common stock portfolio, we use equity collar agreements. These equity collar
agreements limit the market value fluctuations on their underlying equity
securities. Our equity collars are comprised of an equal number of purchased put
options and written call options, each with strike rates equidistant from the
stock price at the time the contract is established. As of September 30, 2003
and December 31, 2002, the fair value of our equity securities portfolio was
$132.0 million and $149.7 million. The fair value of our equity collar
agreements as of September 30, 2003 and December 31, 2002 was $5.7 million and
$12.4 million. A hypothetical 15% decline in the September 30, 2003 value of the
equity securities would result in an unrealized loss of approximately $15.7
million. The selection of a 15% immediate change in the value of equity
securities should not be construed as a prediction by us of future market events
but rather as an illustration of the potential impact of such an event. The fair
value of any unhedged common stock holdings will rise or fall with equity market
and company-specific trends. In certain cases the Company classifies its equity
holdings as trading securities. Gains and losses, both realized and unrealized,
on equity securities classified as trading, are part of investment returns
related to equity indexed universal life insurance policies sold at Maritime
Life and are included in benefits to policyholders. These holdings are
marked-to-market through the income statement, creating investment income
volatility that is effectively neutralized by changes in corresponding liability
reserves.
Foreign Currency Risk
Foreign currency risk is the possibility that we will incur economic
losses due to adverse changes in foreign currency exchange rates. This risk
arises in part from our international operations and the issuance of certain
foreign currency-denominated funding agreements sold to non-qualified
institutional investors in the international market. We do not hedge the
exposure from out international operations. We apply currency swap agreements to
hedge the exchange risk inherent in our funding agreements denominated in
foreign currencies. We also have exposure that arises from owning fixed maturity
securities that are denominated in foreign currencies. We use currency swap
agreements to hedge the foreign currency risk of these securities (both interest
and principal payments). At September 30, 2003 and December 31, 2002, the fair
value of our foreign currency denominated fixed maturity securities was
approximately $995.0 million and $775.2 million. The fair value
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JOHN HANCOCK LIFE INSURANCE COMPANY
of our currency swap agreements at September 30, 2003 and December 31, 2002
supporting foreign denominated bonds was $(170.3) million and $(21.9) million.
We estimate that as of September 30, 2003, a hypothetical 10% immediate
change in each of the foreign currency exchange rates to which we are exposed,
including the currency swap agreements, would result in no material change to
the net fair value of our foreign currency-denominated instruments identified
above. The selection of a 10% immediate change in all currency exchange rates
should not be construed as a prediction by us of future market events but rather
as an illustration of the potential impact of such an event. Our largest
individual currency exposure is to the Canadian dollar.
The modeling technique we use to calculate our exposure does not take into
account correlation among foreign currency exchange rates or correlation among
various markets. Our actual experience may differ from the results noted above
due to the correlation assumptions utilized or if events occur that were not
included in the methodology, such as significant illiquidity or other market
events.
Effects of Inflation
Inflation has not been a material factor in our operations during the past
decade in terms of our investment performance, expenses, or product sales.
ITEM 4. CONTROLS and PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of the ended of the period covered by this report
that our disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Harris Trust Litigation
Since 1983, the Company has been involved in complex litigation known as
Harris Trust and Savings Bank, as Trustee of Sperry Master Retirement Trust No.
2 v. John Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491). After
successive appeals to the Second Circuit and to the U.S. Supreme Court, the case
was remanded to the District Court and tried to a Federal District Court judge
in 1997. The judge issued an opinion in November 2000.
In that opinion the Court found against the Company and awarded the Trust
approximately $13.8 million in relation to this claim together with unspecified
additional pre-judgment interest on this amount from October 1988. The Court
also found against the Company on issues of liability valuation and ERISA law.
Damages in the amount of approximately $5.7 million, together with unspecified
pre-judgment interest from December 1996, were awarded on these issues. As part
of the relief, the judge ordered the removal of Hancock as a fiduciary to the
plan. On April 11, 2001, the Court entered a judgment against the Company for
approximately $84.9 million, which includes the damages to the plaintiff,
pre-judgment interest, attorney's fees and other costs.
On May 14, 2001 the Company filed an appeal in this case. On August 20,
2002, the Second Circuit Court of Appeals issued a ruling, affirming in part,
reversing in part, and vacating in part the District Court's judgment in this
case. The Second Circuit Court of Appeals' opinion overturned substantial
portions of the District Court's opinion, representing the vast majority of the
lower court's award of damages and fees and sent the matter back to the District
Court for further proceedings. The matter remains in litigation and no final
judgment has been entered.
The parties recently reached an agreement in principle with respect to
settlement of this matter. The amount of the proposed settlement has been taken
into account in reserves established in this and in previous quarters.
If the proposed settlement is not finalized and the litigation is not
otherwise settled, notwithstanding what the Company believes to be the merits of
its position in this case, if unsuccessful, the Company's ultimate liability,
including fees, costs and interest could have a material adverse impact on net
income. However, the Company does not believe that any such liability would be
material in relation to its financial position or liquidity.
88
ITEM 6. EXHIBITS and REPORTS on FORM 8-K
a) Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of September 28,2003,
by and among Manulife Financial Corporation, John Hancock
Financial Services, Inc. and Jupiter Merger Corporation, a
Delaware corporation and a direct wholly-owned subsidiary of
Manulife ("Merger Co.").*
31.1 Chief Executive Officer Certification Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934 **
31.2 Chief Financial Officer Certification Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934 **
32.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley
Act of 2002 **
32.2 Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley
Act of 2002 **
- --------------------------------------------------------------------------------
* Previously filed as an exhibit to the John Hancock Financial Services,
Inc.'s current report on Form 8-K filed with the Securities and Exchange
Commission on October 1, 2003, and incorporated by reference herein.
** Filed herewith.
b) Reports on Form 8-K.
During the Third Quarter of 2003 the Company filed the following Current
Reports on Form 8-K:
On August 1, 2003, the Company filed a Current Report on Form 8-K, dated
July 31, 2003 reporting under Item 5 and Item 7 thereof John Hancock Financial
Services, Inc. (JHFS) operating and financial results for the second quarter of
2003. JHFS is the Company's parent and sole shareholder.
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JOHN HANCOCK LIFE INSURANCE COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JOHN HANCOCK LIFE INSURANCE COMPANY
Date: November 10, 2003 By: /s/ THOMAS E. MOLONEY
---------------------
Thomas E. Moloney
Senior Executive Vice President and
Chief Financial Officer
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